CHART PATTERNS
Which Ones Above All?
Top-Performing Reversal Candles
by Thomas Bulkowski
During research for my latest book, Encyclopedia Of Candlestick Charts, I explored the world of candlesticks and found which ones worked and which ones didn't. In this article, I take a closer look at the methodology I used and discuss three candle patterns that work exceptionally well.METHODOLOGY
I spent a lot of time trying to figure out how to test short-term price patterns and found a method I believe works best. For a candlestick that acts as a reversal, price should enter the candle from one direction and exit it in the opposite direction. For example, a bearish harami has price rising into the candlestick pattern, by definition. In order for the candle to act as a reversal, price must exit downward.
What is meant by exit? I used a close either above the top (highest high) or below the bottom (lowest low) of the candle pattern to determine the exit trend. The logic behind this designation is that a candle that is supposed to act as a reversal should cause price to reverse immediately, not next week or next month, and have a lasting effect. It does no good if price reverses by dropping a penny the next day before rising again thereafter. This breakout definition shows both force of the move and the direction.
THE BEST REVERSALS
What are the best reversal candles of the 103 types I looked at? In a bull market, "three stars in the south" wins the prize by working best as a reversal 86% of the time. I'll bet you've never heard of that one, have you? In a search of more than 4.7 million candles, covering hundreds of stocks in both bull and bear markets, I found just nine samples, and of those, six out of seven qualified as bull market reversals. I'm not even going to describe what the pattern looks like because it's unlikely you'll ever see one in your lifetime. In fact, if you looked at 100 stocks in each of the 252 trading days of the year, you would see that pattern about once every 187 years.
...Continued in the June issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the June 2008 issue of Technical Analysis of
STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2008, Technical Analysis, Inc.
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