Unorthodox Candlestick Patterns Are Powerful Too
Human beings love certainty. The science of Mathematics is a study in absolutes. Investors in the stock market continually search for the Holy Grail of mathematical certainty: Sure Thing trading. Unfortunately, Sure Thing does not exist in the stock market, because the rises and falls in the prices of shares and indices are not the result of mathematical calculations; rather, they are the product of human emotion, which cannot be measured by physical means.
There are dozens and dozens of excellent textbooks in print as well as teaching materials available on the Web that outline the basic patterns seen and used in Japanese candlestick technical analysis, along with explanations of their respective predictive capabilities. Typically, these illustrations show the standard patterns in their perfect or “classic” forms.
What is rarely if ever taught is any of the myriad variations on perfect shapes, and the fact that even imperfect formations yield clues to the underlying psychology of the market. Less than perfect patterns often have predictive power. An example begins by considering the Evening Star pattern, which is a three-bar formation that is at the high end of a long price rise. The first bar of the Evening Star is usually a tall white candlestick, indicating a sharp rise in prices for that time frame. The second bar (the “Star”) is smaller, at a higher price level than the first. It may be a “Shooting Star”, which looks exactly as you can imagine it should, from its name. The price action range on the second bar is restricted and the closing price can be higher, lower or equal to the opening price. The third bar will be a tall black candlestick, with a lower price range than the second bar, indicating a strong downward price move for that time frame. All three bars, together, including the Evening Star, which is bearish in its implications.
That is the Evening Star in its perfect or classic form. However, I have found that if two relatively large white bars (rather than one) appear in front of the star, the entire formation becomes a variation of the Evening Star and often contains the same predictive bearish implications as the shape. standard.
The same observation applies at the end of a prolonged price decline, but in reverse. The result is a variation on Morning Star; and I have found that this pattern has bullish implications.
Similarly, if the star (either in the standard three-bar configuration or the four-bar variation) is on top or very near the top of its neighboring bars instead of on top of them, even in non-Forex situations, that is also a variation of an Evening Star and should be respected as it contains bearish implications.
A second example that I would like to cite is the rare occurrence of a double Doji (or “back to back Doji”), with the second Doji being at the same price level as the first, located at the top of a rise or at the extreme limited upper range prices. This formation, which in my opinion can reasonably be called a variation of a Doji, could possibly be considered a pattern in itself. While a Doji is described in the texts as an indication of uncertainty and a possible trend reversal, I am not aware of any reference to a double Doji at the same price level having more significance than a single Doji; or, for that matter, any specific reference to consecutive Doji, at any price level. I would only like to raise the possibility that the second Doji magnifies the importance of the first when their prices are the same, and that the two together, constituting a Double Doji, are more important than a single Doji.
I have deliberately not spent time looking for examples of such training, and one example demonstrates little, if anything. However, one notes that the great Crash of 1987 was immediately preceded by the appearance of a Double Doji as described above. Did it mean something? I’m not prepared to say that he did; but the disastrous price crash that followed is an affair recorded on the charts.
The study of Japanese candlestick patterns is an exercise in judgment, not a mathematical exercise. Even more judgment enters the picture when variations from standard patterns emerge. Maybe it’s time to write a textbook on the topic “Variations in Classical Japanese Candlestick Patterns.” The number of possible variations would seem infinite; therefore, the textbook could be very large or could span many volumes. Who is the game to take on the task?
