Unorthodox Japanese Candlestick Patterns are Powerful, Too
People love certainty. Science of Mathematics is a study in absolutes. Investors in the stock market continuously search for the holy grail of mathematical certainty – Sure Thing commerce. Unfortunately, Sure Thing does not exist in the stock market because advance and decline in stock prices and index prices are not the result of mathematical calculations, but rather they are a product of human emotions that can not be measured by physical means.
There are dozens of dozens of excellent books in print, and teaching materials available on the Internet, which contains the basic patterns that are seen and used in Japanese Candlestick technical analysis, along with an explanation of their predictive capabilities. Typically, these illustrations show the standard patterns in their perfect or "classical" forms.
What are rare if ever, taught any of the numerous variations on the perfect forms, and the fact that even imperfect formations throw out clues about the underlying psychology of the market. Less than perfect patterns often have predictive capacity. An example begins with the reading of Evening Star pattern, which is a three-bar formation found in the upper end of a prolonged increase in prices. The first bar in the Evening Star is usually a tall white candle, indicating a sharp increase in prices for the period. The second bar ("Star") is smaller at a higher level than the first. It may be a "Shooting Star", which looks exactly like you can imagine it would, from its name. The range of price action in the second bar is restrained, and the closing price may be either higher or lower than or the same as, the opening price. The third bar will be a large black light, lower in price category than the second bar, which indicates a strong downward move in prices for the period. The three poles together, including Evening Star, which is bearish in its implications.
It Evening Star is in its perfect, or classic form. But I've found that if two relatively large white bars (rather than one) appear in the Star, the whole formation is a variation of the Evening Star, and often contains the same bearish predictive implications as standard.
The Similarly at the end of a prolonged downturn in prices, but in reverse. The result is a variation of Morningstar, and I found that this pattern has bullish implications.
Similarly, if the Star (in either the standard three-bar configuration, or in the four-bar variation) is at or very near the top of his neighboring bars spot above them, even in non-Forex situations, which also represents a variation on an Evening Star and must be respected as containing bearish implications.
Another example I like to mention is the rare occurrence of a double Doji (or back-to-back Doji ") Doji the second to be at the same price level as the first, lying on top of a ladder or at the top end of range-bound prices. This formation which I think can reasonably be called a variant of a Doji, which may be regarded as a pattern all its own. While a Doji is described in the texts as an indication of uncertainty and a possible change of trend, I am not aware of any reference to a double Doji at the same price level which has no greater significance than a single Doji, or for that matter blame any specific reference to the back-to-back Doji, at any price level. I would just like to posit the possibility that the second Doji magnifies the importance of the first when their prices are the same and the two together constitute a double Doji has greater significance than a Doji alone.
I not deliberately spent time looking examples of such a formation, and an example showing little about anything. But one recalls that the great Crash of 1987 immediately before by the appearance of a Double Doji as described above. Did it matter? I'm not ready to gene, it did, but the disastrous decline in prices that followed is a matter of record in the charts.
The study of Japanese Candlestick patterns are an exercise in decision, not an exercise in mathematics. Even more mean judgments into the picture when variations of the standard patterns emerge. Maybe it's time for a textbook, to be written on the topic "Variations in the Classic Japanese Candlestick patterns." The number of possible variations seems to be endless, so textbook may prove to be very large, or perhaps running to many volumes. Who is game to take on the task?
About the Author
The author is an experienced investor; a retired attorney and corporate CEO; the creator of the “Candelaabra” technical analysis system for use in all financial markets; and has passed the NASD Series 65 Investment Adviser exam. He publishes investment recommendations three times per week to help you keep your money ssfe and to guide you to profit in the financial markets regardless of the direction of price trend. Find out more about making money in any economic climate. Free information and sample up-to-date recommendations are ready and waiting for you, without any cost or obligation, right here at ====> http://www.candlewave.com
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