Why Do Candlestick Patterns Work?

TraderBG · #1 10-02-2008, 03:51 AM

From the moment I started learning to trade I've heard of candlestick patterns. The concepts of price patterns I have no trouble grasping but I'm curious why such a pattern as an engulfment candle works or even a single doji on a time-based chart? Like for instance if price opens a tick or so above the close of the previous candle, and just so happens to be engulfing that candle at the time the candle closes why would that signal anything? Because a second or two later it may not be engulfing. What does the fact that it opened a few ticks higher imply and what is it about set time intervals that is significant? I can understand a few consecutive dojis meaning that supply and demand are coming in balance but I'm having trouble grasping why a lone candlestick might work. Is it because so many people look for it to happen thus self-fulfilling the prophesy or something else entirely?

wasp · #2 10-02-2008, 03:56 AM

Coincidence.

A candlestick pattern alone will not work. They only work in conjunction with more important aspects like support and resistance and trends.

Remember there is only a handful of big money traders looking at candlesticks, on exactly the same timeframe, and looking for textbook cliche setups. Whereas a very high percentage will be looking at key S/R levels as they don't adhere to timeframes, or chart layout style.

Bearbull · #3 10-02-2008, 05:44 AM

Candlesticks are just another way of illustrating price action i.e buying and selling pressure and hence as Wasp stated are relevant at important support/resistance levels.

One can use equivolume bars, point and figure charts, market profile etc to do the same job.

Patterns are a result of the way the traders interact in the market.
Greed and fear manifest in some repeatable patterns which can be exploited, ofcourse after having first understood the buying and selling pressure concepts thoroughly.

brownsfan019 · #4 10-02-2008, 08:25 AM

The 2 above replies are really good.

I have one reco BG before you dive into anything new, esp candlestick patterns - you cannot JUST use candlestick patterns to trade from. There must be something else helping them, such as support/resistance, moving averages, oscillators, etc. etc. You cannot buy a hammer just b/c you see a hammer on your chart.

Also, the lower the timeframe, the less reliable a candlestick pattern can be in and of itself. Again, some other confirmation is needed whatever that may be.

To see an example, see this thread that was initially started by BearBull in another thread that I migrated over here to the CC.

TraderBG · #5 10-02-2008, 05:37 PM

Thanks for the replies. I'm going to start following the CC closely because it's something I'm highly interested in. I had a look at the thread in the link you posted BrownsFan--very interesting indeed. I like what I see here so keep up the great work guys.

brownsfan019 · #6 10-02-2008, 10:26 PM

IMO the 20 EMA thread is the best thread on this entire forum.

Why?

B/c it provides a very manageable entry system that just about anyone can follow. There's some good threads on TL, but I'm not sure anything else is as clear and cut as the 20 EMA thread for entries.

wasp · #7 10-03-2008, 03:22 AM

I'm not one to blow my own trumpet, mainly because it hurts my back and other than the washing, that's what the wife is for but anyhow, I'd also say my live FX trades thread is also rather good for entries, exits, trade management and getting to the bottom of what is really happening in the GJ traders minds and milking it.

TraderBG · #8 10-03-2008, 02:45 PM

Just found your FX thread Wasp. Great stuff. I'll be following along.

wrbtrader · #9 10-05-2008, 09:33 PM

Originally Posted by TraderBG

...I'm having trouble grasping why a lone candlestick might work. Is it because so many people look for it to happen thus self-fulfilling the prophesy or something else entirely?

Single candlestick interval analysis is not reliable if you implied analyzing and making trade decisions based upon one candlestick line.

As for candlestick patterns (more than one interval), it's best to use them in combo with another trade approach as already echoed in this thread.

Simply, don't use them all by themselves.

Mark

AgeKay · #10 10-16-2008, 06:53 PM

Originally Posted by NihabaAshi

As for candlestick patterns (more than one interval), it's best to use them in combo with another trade approach as already echoed in this thread.

Simply, don't use them all by themselves.

Yeah, try it together with astrology. Killer combo.