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Are candlestick patterns reliable?

Posted in Blog

In short: it depends. There are a few factors that highly influence this. These are:

  • The instrument
  • The timeframe
  • The size of the candle pattern
  • The chart pattern

The instrument

Different instruments behave in different ways. The most important thing about an instrument is it’s liquidity, i.e. the traded volume. Generally speaking, the higher the trading volume, the more reliable the candles are. There are some candles that work for forex and other that work more for stocks.

The timeframe

Typically shorter timeframes has less reliability. For example on a one minute chart, it is much less reliable to trade a morning star pattern than on a daily or a weekly chart. The reason is that there is more volatility. On the short run, trader sentiment changes quite frequently, while on a daily or weekly level more reliable long term effects take shape.

The size of the pattern

Larger patterns are usually more reliable. In times when there is low trading volume oftentimes small candle patterns occur that don’t mean much. It’s best to avoid trading these. The bigger the price movement, the stronger the signal.

The candlestick pattern itself

There are different reliability levels with different candle patterns. The general rule of thumb is that the more candles a formation contains, the more reliable it is. This also means however that it appears less frequently. This is the tradeoff.

The chart pattern

It’s important to understand what kind of environment we candle is located in. Are there any support and resistance lines nearby? If the candles confirm these lines, there is a much higher probability for the trade to work out. Is there a prevailing trend? If yes does the signal suggest trading with or against that trend. Usually it works very well to trade e.g. a bullish reversal pattern in the direction of a long term uptrend, at the end of a bearish retracement.

a reliable candlestick pattern: bullish engulfing after a retracement in an uptrand

So are candlestick patterns reliable or not then?

Are candlestick patterns reliable? They are, if you pay attention to the above, you can trade them with confidence.

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