I agree with alot of the points you make, in particular about how chart patterns should not be viewed as infallible, they should be viewed with other market conditions in mind and patterns on longer time frames are more reliable.
I would add however that imo candle patterns shouldnt be viewed as an indication of future price movement and these patterns shouldnt even give one the impression of an increased probability of movement in one direction or the other but should be viewed as a signal of the POSSIBILITY of a potential movement , when all other relevant technical factors are taken into consideration.
This difference in mindset might seem trivial, but it makes a world of differnce.
One mindset seeks to use PA patterns and other technical factors to PREDICT price movement while the other mindset seeks to use the same variables to take advantage of POTENTIAL price movement, knowing full and well that at the end of the day only the market itself knows for sure. Our attempts at predicting price are futile but we need not know the direction as long as we are aware of the possibilty of a possible movement and use risk management to play the market accordingly.
Whilst I agree with the sentiment that candle patterns are not, taken alone, a very consistent indicator of future price movement, I don’t really agree with the wording here.
As traders, the only thing we are interested in is the future direction. And since we all accept that we can never be 100% knowledgeable of that, then all we are trading, whatever the instrument, is probability.
But probability is a very different thing to “possibility”. And if anything, such as candle patterns, only indicates a “possibility” then it is of no value whatsoever to us as traders and shouldn’t be in our toolbox. We already know that there are three possibilities: up, down, unchanged. And (excluding some options strategies) we are only interested in “up” and “down”.
So the purpose of everything we include in our assessment should be to evaluate the strength of probability in one direction compared with the opposite or relative to another product. Is this not the core concept in, for example, strong v. weak currency trading?
This probability evaluation is what provides us with the “edge” or “positive expectancy”. For example, in my case, I rely almost 100% on a few MA’s. But whatever tools we use, the basic idea is the same: to change the default probability outcome of 50/50 to a biased probability outcome of, say, 60/40 or even 70/30. And anything that does not contribute to building this probability bias is redundant. But I don’t think candle patterns are totally redundant in this respect.
Having said that, a win ratio of greater than 50/50 is not essential to consistent winning. Which points to your other comment:
Personally, I fully agree that direction alone is not the key to consistent profitability. Obviously, it has to be right sometimes, but it is the exit strategy combined with both risk and money management that determines the trader’s consistency in profitability. I am sure there are few traders who have never lost a week’s work on one big rash “certainty” trade, or a revenge streak or greed.
But, overall, I believe we are talking the same talk and walking the same walk here. If candlestick patterns work for someone then fine, if not, then ignore them. But,like any other form of indication, they should be understood for what they are as well as what they are not - and not just taken at face value.
Whatever candle we look at, on whatever timeframe, and whatever fancy name it carries, all it is telling us is where the market opened, what happened during that particular period, and where it ended that period. Most candles are meaningless in isolation, and it is up to us to decide when a particular price action demonstrated by a candle (or series of candles) is telling us something significant that we should take notice of.
@anon46773462
I have to agree, probability instead of possibility is the word I should have used.
I guess the point I was trying to make is that its my belief that a trader has to shift ones mentality from the mindset of “prediction” to the mindset of taking advantage of situations where the probability of movement favors a certain direction while allowing for a low risk setup in order to take advantage of that potential movement.
And if we are in fact talking the same talk and walking the same walk then I take that as a compliment of the highest order.
I fully agree and there is also, I think, a strong psychological factor here. If we concentrate on probabilities then it forces us to take a rational and analytical approach to each trade in order to assess its likelihood of success.
But if we just try to predict the next move then it can omit the analytical necessity and include instead more intuition, gut feel, emotions, etc and easily turns our trading into gambling - and, strangely, the only consistent thing about gambling is that one usually tends to lose!
I have always appreciated your postings here, the only “complaint” is that there should be more of them!
If trading is indeed a fool’s game then at least we are fools together!
Its a very rational and quite fair point. But it just doesn’t suit my temperament. I can’t say I’m great at timing entries and I become distressed by negative win rate experience.
asbigger the time frame as more relaiable the pattern is …when using candles as entry signal on ltf i wait for price to hit my zone or sweet spot if it shows a pattern i like to see there its a good sign for an entry
always depends on the area and location they show up in chart
I am still in the beginning stages of my forex journey and i still wonder about candlesticks. Do they tend to have more power in the higher or lower time frames? It seems to me that when day trading on the 1m, 5m, or 15m charts that candlestick patterns are almost the number one way to find a trade setup since support, resistance, fib levels, etc. don’t have much power in those time frames
Well that, in itself, is a valid comment on the use of candlesticks. Different people will see different things.
This was not intended as a detailed analysis, just a quick at-a-glance scan across the chart. Two of them are pin bar types that would have suggested (a) a further break down and (b) a follow-through move up.
That middle red grouping of three candles are almost inside days but the second down day, finishing right on the lows, would have suggested to me a confirmation of the first down day and possible continuation down - which didn’t happen.
I am sure there are other ways of interpreting these, depending on which groupings, etc, are included - and especially with the benefit of hindsight.
I had memorized all the candlestick patterns and had created a screen wallpaper comprised of the patterns I thought were the most important and reliable. That was a long time ago. Now I primarily use range charts and can only remember 2 or maybe 3 patterns. I don’t use them anymore.
When you were using patterns, what timeframes were you mostly applying them to?
Do you have any view on which timeframes they did/didn’t function most, or was the result the same on any timeframe?
(I just thought this might be of interest to people using candle patterns)
Short answer: I don’t remember. Long answer follows …
I’ve been trading for nearly 3 years now and candlestick patterns is the first thing I honed in on. There is an educator by the name of Steven Primo who is big on it. I even bought a candlestick patterns course from someone who Steven recommended highly. But I very quickly came to the realization that candlestick patterns are not a reliable way to trade. I tried using the patterns on various timeframes ranging from 5 mins to daily charts but being that it was so long ago and also very early in my trading journey, my recollection of which timeframes these patterns worked the best on is not very good.
Also once I dismissed candlestick patterns I went back to looking for a better way to trade and found my way to price action trading. PA resonated with me so I mentally cleared my mind of everything else I had learned upto that point. That included candlestick patterns.
My experiences are somewhat similar to yours, @QuadPip and i also came across Primo at some stage, i don’t recall when either!
I have several times tried to look at these over the years but it has never really caught my interest and i always just seemed to find myself forgetting to look at them. They simply weren’t adding on anything beyond what i was already doing and there was no point in studying it further.
But the fact that they are a video recording of what price has actually done during the time of the candle does suggest there is value in analysing them and so i am reluctant to dismiss them totally. But on the other hand there are often occasions where the subsequent candle is the complete reversal of the former - which again shows that a single isolated candle movement does not reliably tell you anything!
Sorry but what is the different between trading candelstick patterns and trading price action?
I’m just going to take a stab at it and see how I go:
Trading candlestick patterns is waiting for the price to show me something over time before I decide what to do. Where as trading price action is seeing what’s happening at this moment and not looking into the past.
Price action has nothing to do with candlestick patterns or even chart patterns. Essentially PA takes into account market structure. As price moves it leaves behind clues as to where it will go next and how far it will travel. Price, in its movements, follows certain rules. The better you get at reading the naked chart the easier your trading will get.
See my posts in the thread linked below for more info and an example trade based on PA. Notice also that the identification of a trend change, in the linked post, relies on market structure.
I think any PA on longer timeframes is more significant. PA on the shorter timeframes has a higher probability of being “noise” imo.
I have never been able to trade on anything less than the 4hr, altough im sure there are many traders that prefer the shorter time frames.
I think it comes down to ones style and apptitude. There is no right or wrong as long as long the end result is positive expectancy over the long term.
Sure you could say thay they have a higher risk tolerance or are higher energy or maybe they tend to lean towards scalping, but I wouldnt want to put a label on a trader simply because they have a different strategy.
I would just say that they are different because they view the market another way.
Every trader and strategy is different, that doesnt mean that one point of view is any better than the other.
We all have to figure out what works for us, there is no right way or wrong way.
I would say however that there are certain universal trading principles that most succesful traders seem to have in common, regardless of how different their approach or strategey may be.
For me, the lower time frames don’t bother me so much. It’s holding trades open overnight that kill me.
It’s amazing how we are all on the same journey except we have to figure it out ourselves. No on can tell us how to do it except maybe guide us. we all look at the market from our own perspective.
Good post!
