CHART PATTERNS
The Helpful Hammer
Strength-Rated Candlestick Patterns
by Mitch E. Mulhall
Perfectly formed candlestick patterns are not common. By ordering
the criteria for a candlestick pattern from most important to least important,
you can rate pattern strength by the number of criteria met.
The criteria for a candlestick pattern may
seem prescriptive, but a given pattern may require a series of subtle qualifications.
This is particularly true of multiple-candlestick patterns. By carefully
ordering the qualities of a pattern, you can determine a strength factor
that can add perspective to your candlestick analysis.
Strength-rated candlestick patterns require charting software equipped
with a formula language that supports "string plots" -- strings plotted
vertically above or below a candlestick -- and is capable of allocating
local variables as study parameters.
To illustrate rating pattern strength, I will outline several helpful
pattern recognition concepts used to identify a hammer, which is a simple,
single-candlestick pattern. Then I will show you how to create a formula
that will add a strength factor to hammer identification. While this article
focuses on the hammer pattern, the technique can be applied to any candlestick
pattern.
TERMS
If you are not familiar with candlesticks, there are two terms you should
understand:
- Body: The difference between the high and the low
- Real body: The absolute value of the difference between the
last and the open.
...Continued in the August issue of Technical Analysis of
STOCKS & COMMODITIES
Excerpted from an article originally published in the August 2004
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2004, Technical Analysis, Inc.
Return to August 2004 Contents
