Are intraday Candlestick patterns useless?

Discussion in 'Technical Analysis' started by newguyintown, Mar 21, 2006.

  1. I'm sure you've all read or heard that candlestick patterns work on all time frames. While that initially made sense to me, I've thought of a potential problem that I'd like to get opinions on.

    Basically, the main crux behind candlesticks is the relationship between the open and the close and how that conveys investor sentiment. While that makes sense for a daily chart, an intraday chart, 15 minute say, is something totally different. What I mean by this is that the "opens" and "closes" on these bars are not true market opens and closes, but rather arbitrary points during the day where that particular bar happened to open and close. So while on a daily chart, an open represents the fact that investors are starting a fresh new day, and the close represents that the day is ending (thereby giving significance to these times and influencing investor perceptions and actions towards them), investors are totally unaware of the opens and closes on a 15 minute bar. And thus is the 15 minute bar (or any other intraday bar) really a significant time period that keeps the effectiveness of candle patterns intact?

    Indeed, if you see a pattern on a 15 minute bar, you know you could get a completely different pattern simply by making that bar a 12 minute or a 17 minute one. The main issue then is that even though it seems there are opens and closes that form the 15 minute bars, in reality it is just continuous trading- unlike daily bars which are interrupted by true opens and closes that mark actual perceivable timeframes for the bulls and bears to battle. So without perceivable time frames, why does it matter if you wait for a candle to actually close to show if the pattern was formed or not? After all, the close was just an arbitrary time point with no significance.

    Does all of this then not negate the significance of the intraday patterns all together? (I hope not, let's hear ur opinions).

    And by the way, do any of you trade based on intraday candlesticks? more importantly, are any of you profitable doing it?

  2. kate


    If your data is off by even a few seconds and you are trading a fast market it is quite possible that the construction of the candle will not be accurate thereby giving you false signals.

    Don't recommend them at all!!
  3. candles, like charts themselves are just a tool

    they are not "useless' on intraday (or any time frame).

    however, in and of themselves, they do not make up a robust trading system.

    all they do is help visually model a series of prices over a given time frame. that is what ALL charts do, in general (except for P&F charts which don't set up one axis on a time frame, but i digress)

    they are just a way to represent price (or in the case of tick charts - transactions) per unit/time.

    use them as a tool. that's all they are.
  4. Depends on the market, but for the most part, I do not think candlesticks are very useful. In an illiquid market I think they are completely useless. I don't use any charts for trading. I'll look at them when I've been away from my desk for a while just to see what happened while I was gone, but for me charts generally do more harm than good. As a disclaimer a very small portion of my income comes from speculating and a very large portion comes from providing liquidity.
  5. CTTrader


    I've read all of Steve Nison's books, have both DVD programs, and attended his seminar. Although he states that the Japanese use candlecharts primarlily on weekly and daily charts, he does go to intraday patterns to get early signals.

    Look at intraday charts, identify candle patterns and see what developed. They are just as useful on intraday charts as on daily or weekly charts with the main difference that you rarely get windows (gaps) on intraday charts.

    I use candlestick patterns profitably on 1 min, 5 min, 10 min, 60 min charts. There are a few key points that many people misunderstand that causes them to get burned with candle patterns:

    1. Candlesticks are a TOOL to use in a system. They are not a system in themselves and just like any other tool they are not 100% certain. Rely on candlesticks alone and you WILL lose your entire account.

    2. Candlesticks do not indicate the amount or duration of a move, only the direction.

    3. You can get the exact same information on a bar chart, it's just a lot harder to see. It's not magic.

  6. IMHO, the "secret," for lack of a better word, in intraday trading is reading the price action. How or what you chose to read that action is irrelevent to whether you are successful or not. IOW, contrary to popular belief, there are no magic indicators, settings, or charting type that will determine your success rate.

    That's my .02 and worth every damn penny! :D

  7. CTTrader


    I forgot to add that the shorter the timeframe the more important it is to wait for the candle to close before interpreting it.

    Whereas you can often estimate the final candle on a daily or 60 min chart before the close, a 1 min candle can change radically in 20 seconds.
  8. I started using these in real-time intra day with decent results. I believe the key is to be able to spot them when they happen and not just sit there and hope. Since TI added that functionality recently I have been playing around with it and like it.
  9. Hi newguyintown,

    First, if you read somewhere that candlestick patterns work on all time frames...

    Either that source is misinformed or you misunderstood the info you read.

    Here's my rephrase and what you should have read or heard.

    Some candlestick patterns are useful while most are not and some patterns usefulness are specific to particular trading instruments.

    Also, there's no one interval that's more significant than any other interval.

    The issue is what type of trader are you...start there first and then select the appropriate interval to be concerned about...not the other way around.

    The only difference is how active of a trader you want to be.

    For example, if your looking for 3-5 candlestick pattern signals per day...

    Probably not suitable to be using the 15min chart interval or higher because you will not get 3-5 pattern signals per day if your using Japanese Candlestick Analysis properly.

    Something else, understand that some trading instruments almost trade 24hours and to ignore their overnight trading session especially when key economic reports are involved...

    You'll be ignoring the critical changes in supply/demand.

    Yet, if your reference was to stocks (its important to be specific about what trading instruments your talking about)...

    Use the daily charts if you feel its your preferred interval and don't be concerned with what others are using especially if your not even a day trader (using intervals like 15min, 10min, 5min and so on).

    Simply, its a waste of time and energy to be comparing the daily chart to the 15min chart when your not even a day trader and/or when both intervals are applied differently do to the types of traders that use them.

    Long term traders tend to use daily charts.

    Position traders tend to use 15min charts.

    Both the above types of trader have different goals, different entry signals, different trade management et cetera.

    As been repeated here at ET by many traders in many different threads that's similar to your discussion...

    * Don't use Japanese Candlesticks as a surrogate mother to understanding the price action.

    Simply, if you don't know what's going on prior to the appearance of any particular candlestick pattern...

    Don't use candlesticks to tell you what's going on.

    * Don't apply them to illiquid markets that produce "iffy" patterns.

    * To compensate for a data provider that give bad quotes (false signals) especially during fast moving markets...

    You must understand the price action prior to the appearance of any candlestick pattern that may support what your seeing.

    * As hinted above about what I said about their usefulness...

    Know your trading instrument to help eliminate the candlestick patterns that aren't useful.

    Simply, as an example...Bullish White Hammers may work well on the Eminis (ER2, ES, NQ, YM) but may work poor on stocks in the Utility sector.

    * Know your sub-groups...there are over +12 Bullish White Hammer patterns and only a few are reliable.

    The others, I wouldn't risk a single penny on them.

    * It's not voodoo or magic...its just a way to get a quick visual representation of the price action.

    * It should be used as a confirmation tool to what you already know.

    Don't use it to tell you what's going on with the price action and you'll eliminate the most common reason why traders say they failed and/or couldn't find any usefulness.

    * Trade managment after entry is just as important as the pattern signal itself.

    * Learn and understand that its the Entry Signal that determines which Pattern Signal is suitable.

    * Those that failed at using Japanese Candlesticks...if you question them to be more'll see the usual problem that most have encountered.

    For example, lets pretend you got one of those reliable Bullish White Hammer patterns...

    The entry signal will determine if you should trade it or not (most backtesters in error only test the pattern signal).
    You also said something I've seen by traders that shouldn't be using Japanese Candlesticks.

    Further, you said something else that caught my attention and concern...

    Lets pretend you see a Bullish White Hammer pattern on the daily chart with 2 hours remaining in that daily interval.

    You go Long and soon after the market tanks and upon the close of the daily produces a bearish candlestick pattern that's no longer a Bullish White Hammer pattern.

    Always wait for confirmation which implies to wait for the interval to complete to prevent trading illusions.

    Thus, if you truly believe it doesn't mattern or the close of any particular interval has no significance...

    Stay away from Japanese Candlesticks because you will go broke and that won't be an illusion.

    Your question should be...

    Are any of you trading the following patterns (be specific) and can you help me with some insights on how to improve my trading in these particular candlestick patterns?

    Why my rephrase of your question?

    All the profitable traders I know aren't using Japanese Candlesticks all by itself...they are using it a confirmation tool.

    Let me give you a big key to trading successfully via intraday Japanese Candlesticks are key economic reports price reaction.

    Another key hint is to learn all you can about supply/demand (many good threads about such here at ET).

    I've just never met a trader that's profitable consistently via exclusively trading only Japanese Candlesticks on any intraday level.

    I've also met many misinformed traders that failed in trying to use Japanese Candlesticks all by itself as if it was some holy grail.

    All the above has been discussed here at ET many many times before and you can use ET search menu to dig deeper in anything that someone has said in this thread so far...

    (a.k.a. NihabaAshi Japanese Candlestick term
  10. Well thank you all for the detailed responses.... especially NihabaAshi. Just to make it clear, I don't intend to use them exclusively, but rather to use them to provide my entry and exit signals in the context of a broader top-down market approach that looks to be in the direction of the market and in the best performing sectors (or worst performing if looking to go short that day). Moreover, I'll be using western technical analysis to add to my probabilities of success by only entering those signals that clearly indicate that the odds are in my favor.

    Anyhow, thanks for all your input and i'll keep it all in mind.
    #10     Mar 22, 2006