Don’t worry about candle stick pattern formations in trading.
One of the many rabbit holes, that new traders fall into, is thinking that they need to learn an encyclopedia of candlestick formations to be successful traders.
This is simply not true. Learning a hundred minor patterns won’t tell you anything if you can’t read market context. Context matters much more than the detail of one candlestick against another. Candlestick study is a refinement to your core plan.
Most price movement is just noise with marginal relevance to your trading strategy. What matters is the structural price moves in relation to your strategy, not the size of one candle compared to the one before it. Price is either moving up down or ranging sideways. It doesn’t really matter the shape of the candlestick. What matters is the direction of price when it is hitting your trigger point.
The study of candlestick shapes and giving them names is an attempt to appear to be in control. A desperate grasp for meaning by those that cannot accept the idea that they can’t predict the direction of price.
This ‘need to know’ is rooted in psychology. The unknown causes mental tension that is in conflict with our desire for the comfort of predictability. So we invent meaning and narratives to make it make sense to us. It is a flaw in the mind of man that cannot be content with things as they are. In trying to place meaning onto candles you are projecting your fear of uncertainty onto the chart.
Candlestick patterns usually have very short timeframes while chart patterns have longer timeframes. Candlestick patterns are a few days while the chart patterns can last months or even years.
When you have an actual strategy that you trade, with stops, entries etc, do you really think that the shape of a candle is going to be of any significance. Levels, volume and your rules will tell you to take the trade over some localised price bar.
Change the time frame on your chart program and watch what happens to your minor candlestick pattern. Open and close prices can completely change, and with that the arrangement of your candles change with it.
We think that we need to learn candlesticks because we hope that it will tell us what is happening in the market. But a big problem is time frames. Open and close prices all changes with every time frame. So, which time frame to you trust.
You don’t need to study the coils on a rope to know that it is a rope.
Just because a price chart is made up of candlesticks doesn’t mean that you need to study or give meaning to each one.
I know that you are better served by studying things like impulse moves, support and resistance or how price moves from volatility to compression and back to volatile again.
Occasionally a candlestick pattern will alert a trader of important situations evolving in the market. But it takes real experience to spot those situations. Not a few weeks of remembering names of patterns from a PDF printout you got from some Guru on Twitter. And, let’s be honest, he swiped it from someone else.
The new trader isn’t at that level so time spent trying to learn 100 minor pattern variations is a ridiculous waste of your energy. You simply don’t yet know enough to know when they are useful and when they are not. To add to that, if you were to study minor patterns then you also need to include the study of volume. The study of one without the other is meaningless.
Sometimes the size and volume of a candlestick is of major importance. A significant impulse move in price on a major increase in volume is often a precursor to price reversal or it can be a departure point for price to revisit in the future. Those events are worth your study.
The study of minor moves is for traders that have a very niche approach to trading.
Many new traders can be categorised as trend breakout or breakout and confirmation traders. If price hits your line in the sand then it qualifies it as a trade. The size of the candle is going to be irrelevant. Another example, for the S/R traders would be if price breaks resistance. If the conditions meet your rules then you will take the trade. You wouldn’t let the size of the candle stop you from taking a qualified trade, would you?
I think people are conflating price movement with the tool that is used to help explain the movement in price. ( The Candlestick ) The candlestick is just a representation of the thing that really matters. Price and direction in relation to your setup.
Trades are not triggered because of minor patterns. Trades present themselves in context of price movements that can take days, months or even years to set up.
Take a look at the next image. I took a trade at “B”. I didn’t take this trade because the preceding 3 candles formed some pattern from the encyclopedia of candlesticks. I took the trade because of the context of price movement beginning from point “A”, months earlier. A devotee of minor candlestick patterns is looking at just a few trees when they should be looking at the forest.
The study of candlesticks is great for people that want to sell books and courses. Or for social media Guru’s that want your attention. But if you want to learn how to read a chart then zoom out and go look at the situations I mentioned earlier in this article. Supply and demand, support and resistance and impulse moves.