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Candlestick Patterns

Candlesticks Patterns Classification

Candlestick Patterns Classification The candlestick patterns can be classified by following parameters: a time frame, a number of bars, a projected direction, a signal type (continuation vs reversal), reliability, profitability, a signal direction, and a pattern frequency.

The classification by the number of bars is the easiest way to classify the candlestick patterns. TheGreedyTrader.com web site provides a daily candlestick recognition, including patterns that have one to five bars. The classification of the candlestick patterns by the projected direction identifies the expected future bullish or bearish price movement.

The candlestick patterns classification depends not only on the shapes of the candles, but on the trend in which they appear. For example, a candle has a small real body and a long lower shadow that appears in a rising trend is called a hanging man pattern and considered a bearish reversal pattern, while the same pattern in a falling trend is called a hammer and considered a bullish reversal pattern. We need to keep in mind that different pattern recognition systems may have different definition of rising and falling trends; this definition depends on the time frame under consideration.

The similar issue appears when candlesticks are classified by a signal type as continuation or reversal patterns. A reversal pattern signals a possible trend reversal, while a continuation pattern appears usually after a short pause or pullback and signals that the current trend most likely will resume. The difference between a price trend reversal and a pullback depends on the time frame under consideration. Different candlesticks researches that have different definitions of the pullback, may classify the same pattern as a reversal or as a continuation. For this reason, the candlestick patterns classification may vary in different researches. In our candlestick pattern research we use our proprietary daily, weekly, and monthly price trend definition for the candlestick patterns classification. The following real life example shows how the same candlestick pattern can be considered a reversal or continuation signal depending on researcher's time frame.

Continuation and Reversal Candlestick Patterns
The price chart of NetApp, Inc. (NTAP) above shows a weekly downtrend (AD) that started on April 3rd, 2012 and ended on May 24th. It has three daily sub waves (AB), (BC), and (CD). The bearish Harami candlestick pattern, formed on May 1st - 2nd, 2012, signaled a reversal of the daily uptrend BC and the beginning of the new bearish trend CD. So for the daily uptrend it was a reversal signal, but for the weekly downtrend AD the same pattern was a continuation signal that appeared in a weekly downtrend after a short price retreat.
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