Thomas Bulkowski - Candlestick Chart patterns
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Thomas Bulkowski the highly regarded author of ‘Encyclopedia of candlestick charts’, not only identified patterns but he was able to build rankings of reliability around them.
Bulkowski managed to retire at the age of 36 from his trading endeavours and soon after he created a website called The Pattern Site.
In this review we provide the top 5 candlestick patterns from the 103 presented in the book. All of which you can apply to your trading strategies straight away.
Let’s take a look..
Thomas Bulkowski defined two kind of pattern outcomes;
A ‘reversal’ pattern which predicts a change in price direction, and a continuation pattern which predicts an extension in the current price direction. This is classed as a bullish example, although the same principle and classification also apply to a bearish pattern.
Let’s get straight into the 5 most reliable candlestick patterns, starting with number 5 the bearish ‘ Two Black Gapping’ continuation formation, this pattern predicts lower prices with a 68% accuracy rate.
The bearish two black gapping continuation pattern appears after a notable top in an uptrend, with a gap down that yields two black bars posting lower lows. This pattern predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend.
Both black candles can be of any size so long as the second black candle has a lower closing price than the low of the first candle.
Bulkowski used a sample size of 18,264 patterns of this nature to determine a downside continuation, a continuation occurred 68% of the time after the formation.
He also concluded that the predictability performed equally well in bull and bear markets, however as we can see from the performance table below there is a slightly better performance in a bear market, showing a 3.11% decline after 10 days. A great short selling return over such a short period.
In 4th place we have the bullish ‘Abandoned Baby’ reversal formation which predicts an increase in price 70% of the time.
The reversal pattern appears at the low of a downtrend, after a series of black candles print lower lows.
The market gaps lower on the next bar, but fresh sellers fail to appear, yielding a narrow range ‘Doji’ candlestick with opening and closing prints at the same price.
A bullish gap on the third bar completes the pattern, which predicts that the recovery will continue to even higher highs, again, perhaps triggering a broader-scale uptrend.
Of 4.7 million candle formations analysed, Bulkowski found only 293 abandoned baby formations, of which a reversal happened 70% of the time.
There was similar performance calculated in both bull and bear markets, with bull markets nudging ahead over a 10 day period with a 2.59% price increase.
This may be considered a small number but annualised this would equate to almost a 95% return.
In third place we have the ‘Evening Star’ bearish reversal formation, which according to Bulkowski predicts lower prices
with a 72% accuracy rate.
The evening star reversal pattern starts with a tall white bar that carries an uptrend to a new high.
The market gaps higher on the next bar, but fresh buyers fail to appear, yielding a narrow range candlestick. A gap down on the third bar completes the pattern, which predicts that the decline will continue to even lower lows.