Candlestick Charts: A Brief History

  • Candlestick charts are a technical tool that pack data for multiple time frames into single price bars.
  • Candlestick charting dates back to 18th century Japanese rice traders.
  • Patterns allow for short- and long-term profit opportunities.

3 Candlestick Patterns

  • Here are three candlestick patterns that can give a strong indication price direction and momentum.
  • Their potency decreases rapidly three to five bars after the pattern has completed.

Thomas Bulkowski

  • This analysis relies on the work of Thomas Bulkowski,
  • He built performance rankings for candlestick patterns in his 2008 book, “Encyclopedia of Candlestick Charts.”
  • He offers statistics for two kinds of expected pattern outcomes: reversal and continuation.
  • Candlestick reversal patterns predict a change in price direction
  • In the following examples, we can see three of Bulkowski’s favourite reversal patterns!

Pattern 1: Three White Soldiers and Three Black Crows

Three White Soldiers:

  • Three white soldiers start at or near the low of the downtrend
  • Three white bars post higher highs (White soldiers)
  • This pattern predicts that he uptrend will continue to even higher highs
  • It can trigger a further uptrend

Three Black Crows:

  • Three black crows start at or near the high of an uptrend
  • Three black bars post lower lows
  • This pattern predicts that the decline will bring lower lows,
  • It may trigger a broader-scale downtrend.

According to Bulkowski, this pattern predicts higher/lower prices with a 78% accuracy rate.

Pattern 2: Morning & Evening Star Reversal Pattern

Morning Star Reversal Pattern:

  • The bullish morning star reversal pattern starts with a tall black bar that pushes a downtrend to a new low.
  • The market gaps lower on the next bar but new sellers fail to appear
  • A gap up on the third bar completes the pattern
  • It predicts that the uptrend will continue to higher highs
  • It may trigger a broader-scale uptrend.

According to Bulkowski, this pattern predicts higher prices with a 72% accuracy rate.

Evening Star Reversal Pattern:

  • The bearish evening star reversal pattern starts with a tall white bar that carries an uptrend to a new high.
  • The market gaps higher on the next bar, but fresh buyers fail to appear, yielding a narrow range candlestick.
  • A gap down on the third bar completes the pattern, which predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend.

According to Bulkowski, this pattern predicts lower prices with a 72% accuracy rate.

Pattern 3: The Abandoned Baby

The Bearish Abandoned Baby:

  • The bearish abandoned baby reversal pattern appears at the high of an uptrend
  • It appears as higher lows.
  • The market gaps higher on the next bar
  • Fresh buyers fail to appear
  • A narrow range doji candlestick with opening and closing prints at the same price.
  • A bearish gap on the third bar completes the pattern
  • It may trigger a broader-scale downtreand.

According to Bulkowski, this pattern predicts lower prices with a 70% accuracy rate. 

The Bullish Abandoned Baby:

  • The bullish abandoned baby reversal pattern appears at the low of an downtrend
  • It appears as we print lower lows.
  • The market gaps lower on the next bar
  • New sellers fail to appear
  • A narrow range doji candlestick with opening and closing prints at the same price.
  • A bullish gap on the third bar completes the pattern
  • It may trigger a broader-scale downtreand.

According to Bulkowski, this pattern predicts higher prices with a 70% accuracy rate. 

 

Uncle Bob is veteran of the crypto game. None of what is written should be taken as financial advice and before investing everyone should do their own due diligence.

Uncle Bob has a well followed crypto related twitter account and can be viewed here

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