Candlestick pattern recognition in stock charts - Trade Algo

Understanding Japanese Candle Stick Patterns



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Foreword

The mission in Trade Algo is to always check ideas before trading them even if they are rooted in the classics of trading. You never know if they work or not before you try it on history or live trading. In this article, I present the classic candle stick patterns from Gregory L. Morris book. I hope to analyze the ef ectiveness of these patterns and check if they work or not further in my blog and possible develop some ready code framework and tools to work with the results I get.

Anyhow candle stick patterns are a big chapter in trading and should not be overlooked. This is the first thorough article that considers the classic implementation of patterns back in the days. I’m not sure when the book was published but it even talks only about daily timeframes.

Mymissionisofcourseto take it further and investigate how they work and fail. Design and optimize them and explore other, contemporary authors like Viktor Lichovidov from Stocks & Commodities magazine who have very cool ideas on candle stick patterns.

I hope this little candle stick encyclopedia consisting of over 50 patterns will be useful for you. However please consider the risks and don’t take these patterns as a rule of thumb. The patterns are also available to download as pdf for registered users.

1 Reversal Candle Stick Patterns

1_0-1_1 Hammer and Hanging Man

Comments

  • Candles required for the pattern: 1

  • Does it require confirmation: yes, for bullish reversal next candle should open higher than signal candle close and close higher than open.
  • Body color doesn’t matter
  • The long tail should be at least two-three times larger than the body size
  • Very short or no other tail at all

1_2-1_3Engulfing

Comments

  • Candles required for the pattern: 2

  • Does it require confirmation: yes, the third candle’s close price should not be beyond the body size of the second candle in the trend direction
  • The second candle body should be larger than the first candle body.

1_4-1_5 Harami

Comments

  • Candles required for the pattern: 2
  • Does it require confirmation: yes, the third candle’s close price should be in the direction of the reversal
  • Like the inside day but based on closing and opening prices.

1_6-1_7 Harami Cross

Comments

  • Candles required for the pattern: 2
  • Does it require confirmation: yes, the third candle’s close price should be in the direction of the reversal
  • Dodji of the second candle should be inside the body of the first candle

1_8-1_9 Inverted Hammer and Shooting Star

Comments

  • Candles required for the pattern: 2
  • Does it require confirmation: yes, for bullish reversal next candle should open higher than signal candle close and close higher than open.
  • The long tail should be at least two-three times larger than the body size
  • Very short or no other tail at all

1_10-1_11 Piercing Line

Comments

  • Candles required for the pattern: 2
  • Does it require confirmation: no
  • Second candle should close above half of body of first

1_12-1_13Dodji Star

Comments

  • Candles required for the pattern: 2
  • Does it require confirmation: yes
  • First candle big candle in trend direction
  • The dodji shades, tails, its volatility inside should not be too large

1_14-1_15 Morning and Evening Star

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: no
  • Candle one big body, candle two small body, gap between
  • Gap between candle two and candle three

  • Candle three closes inside body of candle one

1_16-1_17 Morning Dodji and Evening Dodji Star

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: no
  • Candle one big body, candle two is a dodji candle, gap between
  • Gap between candle two and candle three

  • Candle three closes inside body of candle one

1_18-1_19 Abandoned Baby

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: no
  • Same as dodji above but gap is between the tails
  • Gap between candle two and candle three tails and candle one tails
  • Candle three closes inside body of candle one

1_20-1_21Tri Star

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: yes
  • Gap between the middle dodji and the dodjis on the sides
  • All three are dodji candles

1_22-1_23 Upside Gap Two Crows

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: no
  • First candle is large in body size
  • Second bearish candle open price should be higher than candle two open price and should close below close of candle two
  • Gap up between candle one and two and candle two and three a bearish

1_24-1_25 Meeting Lines

Comments

  • Candles required for the pattern: 2
  • Does it require confirmation: yes
  • The closing prices of two candles are the same

1_26-1_27 Belt Hold

Comments

  • Candles required for the pattern: 1
  • Does it require confirmation: yes
  • No tail on the candle
  • There should not be any alike candles around

1_28-1_29 Unique Three River Bottom

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: no
  • Candle two tail is the minimum for all three candles
  • Candle three should be lower candle two close price
  • Candle directions are as shown

1_30-1_31 Three White Soldiers & Three Black Crows

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: no
  • Every candle close should be higher/lower than the previous
  • All have nice big bodies

  • All should close near candle max/min

1_32-1_33 Advanced Block

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: no
  • Every candle open price is inside the body of previous candle
  • Long tails of day two and three

1_34-1_35 Delibiration

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: yes
  • Candle 1-2 long bodies with no tails
  • Little gap between 2 and 3

1_36-1_37 Three Identical Crows

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: no
  • Candles close prices equal new candles open prices
  • Looks like a stair with short tails

1_38-1_39 Breakaway

Comments

  • Candles required for the pattern: 5
  • Does it require confirmation: yes
  • First candle is a big body one after which there is consolidation
  • Gap between 1-2

  • Last candle closes inside the gap of 1-2

1_40-1_41Two Crows

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: yes
  • Gap between 1-2

  • Gap between 1-2
  • 3 opens inside candle two body and closes inside candle 1 body

1_42-1_43ThreeInsideUp andThreeInsideDown

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: no
  • Everything just like harami
  • Candle 3 closes beyond the body of candle 1

1_44-1_45ThreeOutsideUp andThreeOutsideDown

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: no
  • Everything just like engulfing
  • Candle 3 closes beyond the body of candle 1

1_46-1_47ThreeStarsin theSouth

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: yes
  • Seconddcandle tailisinsidethefrstdayrange
  • Candle 3 is inside candle two trading range and its a maribozu, no tails

1_48-1_49 Concealing Baby Swallow

Comments

  • Candles required for the pattern: 4
  • Does it require confirmation: no
  • First two candle are maribozu ie. without tails
  • Gap between 2 and 3 with trading activity inside candle two as well
  • Candle 4 totally engulfs candle 3

1_50-1_51 Stick Sandwich

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: yes
  • Candle 2 closes above candle 1
  • Candle 3 closing price equals candle 1 closing price

1_52-1_53 Kicking

Comments

  • Candles required for the pattern: 2
  • Does it require confirmation: no
  • Two no tail candles

  • Gap between candles

1_54-1_55 Homing Pigeon

Comments

  • Candles required for the pattern: 2
  • Does it require confirmation: yes
  • Second candle is fully inside the body of the first one

1_56-1_57 Ladder Bottom

Comments

  • Candles required for the pattern: 5
  • Does it require confirmation: yes
  • First three black crows appear, long candles with almost no tails
  • Candle 4 has a long tail

  • Gap between 4-5 or open should be higher
  • 5 should close above the previous two candles

1_58-1_59 Matching Low

Comments

  • Candles required for the pattern: 2
  • Does it require confirmation: yes
  • Candle two closing price should be the same as candle one closing price

2 Trend Continuation Candle Stick Patterns

2_0-2_1 Upside and downside Tasuki Gap

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: yes
  • Gap between two candles in the same direction
  • Candle 3 opens inside candle 2 body

  • Candle 3 should close inside the gap

2_2-2_3 Side by sideWhite Lines

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: yes
  • Gap between candles 1 and 2 in the same direction
  • Candle 3 opens roughly in the same spot as candle 2

2_4-2_5 Rising and Falling Three Methods

Comments

  • Candles required for the pattern: 5
  • Does it require confirmation: no
  • The three small candles after the first big one should stay within its range
  • Closing price of candle 5 should be higher than candle 1

2_6-2_7 Separating Lines

Comments

  • Candles required for the pattern: 2
  • Does it require confirmation: yes
  • First candle is against the trend
  • Candle one open price and candle two open price are the same

2_8-2_9 Mat Hold

Comments

  • Candles required for the pattern: 5
  • Does it require confirmation: no
  • Very similar to rising/falling three methods except the ladder price movement at first gaps out of candle one range.
  • Last candle breaks out and closes higher than candle one closing price

2_10-2_11 Three Line Strike

Comments

  • Candles required for the pattern: 4
  • Does it require confirmation: no
  • Very similar to three soldiers – the first three candles
  • Last candle opens higher than candle one close and closes below candle one open

2_12-2_13 Upside and Downside Gap Three Methods

Comments

  • Candles required for the pattern: 3
  • Does it require confirmation: yes
  • Gap between candle 1 and 2
  • Candle 3 body fills the gap in the opposite direction of the trend

2_14-2_15 On Neck Line

Comments

  • Candles required for the pattern: 2
  • Does it require confirmation: yes
  • A big body candle in the trend direction
  • A small body opposite trend candle opens below candle one min price and closes near or equal to candle one min price

2_16-2_17 In Neck Line

Comments

  • Candles required for the pattern: 2
  • Does it require confirmation: yes
  • A big body candle in the trend direction
  • A small body opposite trend candle opens below candle one min price and closes near or equal to candle one closing price
  • Almost the same as previous «On Neck Line»

2_18-2_19 Thrusting Line

Comments

  • Candles required for the pattern: 2
  • Does it require confirmation: yes
  • A big body candle in the trend direction
  • Second candle opens far beyond the min of candle one and closes near but not over the middle of candle one body

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