Candle Pattern Analysis

A Japanese candle pattern is a psychological depiction of traders' mentality at the time. It vividly shows the actions of the traders as time unfolds in the market. The mere fact that humans react consistently during similar situations makes candle pattern analysis work.

A Japanese candle pattern can consist of a single candlestick line or be a combination of multiple lines, normally never more than five. While most candle patterns are used to determine reversal points in the market, there are a few that are used to determine trend continuation. They are referred to as reversal and continuation patterns. Whenever a reversal pattern has bullish implications, an inversely related pattern has bearish meaning. Similarly, whenever a continuation pattern has bullish implications, an opposite pattern gives bearish meaning. When there is a pair of patterns that work in both bullish and bearish situations, they usually have the same name. In a few cases, however, the bullish pattern and its bearish counterpart have completely different names.

Using Computers for Candle Pattern Identification

A personal computer with software designed to recognize candle patterns is a great way to remove emotion, especially during a trade. However, there are a couple of things to keep in mind when viewing candlesticks on a computer screen. A computer screen is made up of small light elements called pixels. There are only so many pixels on your computer screen, with the amount based upon the resolution of your video card/monitor combination. If you are viewing price data that has a large range of prices in a short period of time, you may think that you are seeing many Doji days (open and close price are equal) when in fact, you are not. With a large range of prices on the screen, each pixel element will have a price range of its own. A computer software program that identifies patterns based on a mathematical relationship will overcome this visual anomaly. Hopefully, the above explanation will keep you from thinking that your software isn't working.