Candle patterns filtering

Discussion in 'Technical Analysis' started by GiaMa, May 29, 2005.

  1. GiaMa



    I'm sorry for my bad english.

    I think that using some filter while observing candlesticks is necessary to reduce "false signals" in trading.

    What indicator or method do you think is more efficient to filter signals you obtain using japanese candlesticks?

  2. Hi GiaMa,

    I don't see it as getting false signals.

    I see it as possibly trading the wrong candlestick patterns or that possibly your trading something that's misinterpreted (something you thought is a particular pattern but really is not).

    Show some chart examples and I'll respond with a few tips (stuff I've already posted about here at ET).

    However, until I know what specific pattern(s) your discussing all I can say for right now are the following...

    * Wide Range Bodies (helps to understand supply/demand)
    * Long Shadows (not the candlestick body)

    Just remember, each candlestick pattern is different and you can't take one filter and apply it to all candlestick patterns and expect good results.

    Also, all the filters I'm talking about are price action only (no moving averages) such as the two above I've mentioned.

    Last of all, no matter what your must understand what the price action is doing prior to attempting to apply Japanese Candlesticks (not the other way around)...

    That alone will get rid of a lot of false signals.

    P.S. Approach candlesticks without any computer'll learn it much faster and discover what really works in comparison to those that are trying to apply candlesticks via some code.

  3. GiaMa


    Thanks for your answer, NihabaAshi.

    I would really like to talk about many "doubts" I can have while interpreting candlesticks.

    I'm going to look for some examples to discuss about and I'll post the image here.
  4. GiaMa


    For instance, these kind of "filtering".

    First picture is the Eurostoxx, daily, at friday close.
    I see the last candle as an Hanging Man but, as we are still in short term uptrend, I think that this H.M. alone is not enough to suggest to go short. At least is too risky to short on this close.
  5. GiaMa


    Less risk (I think) if the candle in the picture above was, for instance, over or near the upper band (or use another "filter"), as in the 2 circled candles in this second picture (by the way, another doubt, please: the second picture, on the right. Do you consider it an harami line or not?)

    I'll look for some other example...
  6. Regarding your candlestick examples let me offer some advice. Taking a position based on whether or not a candlestick formation is a "Harami" is not going to work. You need to look at the whole picture. In the first example, I would be looking for a close lower than the midline of the previous candle on increasing volume. The example you provide indicates that buyers came into the market to support price.

    On the second example, I notice that you are indicating support incorrectly. Most of the time the midline of a wide range candle offers support to price action. On an intraday basis, if the midline of the candle is penetrated on increasing volume, that can signal a reversal and a good short trade. For the second example, selling came into the market late in the day. This was a signal that a possible reversal of trend might occur.

    In addition to candlestick formations, you need to look at volume and if possible, it is helpful to know when that volume came into the market. If volume came into the market to support price late in the day, it is usually an indication that institutions are buying. Early volume is often a combination of institutional and retail participation.

    Good luck,
  7. Hi GiaMa,

    I'm sure you've probably already read (book or website) that the Hanging Man is a bearish reversal signal that requires confirmation via the price action of the following trading day.

    Now...unless you know something about candlesticks that puts you ahead of those authors while your trading via candlesticks...

    I would not advise doing an early bird entry and hope that by the end of the trading day you've caught a big fat worm.

    With that said...Lefty62151 said something valuable that correlates with that first chart (hanging man)...

    ...I would be looking for a close lower than the midline of the previous candle...

    I'll take it one step further...the price action the day after hanging man needs to close below the mid-point of the wide range body that occurred prior to the hanging man line...

    Preferrably it be a dark candlestick line that doesn't close below the low of the dark line that occurred before the wide range body.

    As for your 2nd chart...I don't like to discuss stock charts.

    With that said...I'm going to make an exception and say the following without discussing any candlestick patterns...

    Only discussing price action only.

    Both of those price action on your chart that's circled are the exact same short signal based on the interaction of the wide range body and the 3 intervals after the wide range body.

    A wide range body that gives a lot of info about supply/demand.

    The only difference between the two circled wide range bodies is that one gives more info about supply/demand than the other.

    In addition, the bullish version of that price action occurred on your chart.

    I'll leave it at that and let you figure out the rest on your own.

    Now...notice how I haven't discussed any indicators as filters...don't need to.

    The filters are in the price action itself...they can be either the price action that leads into the wide range body, the price action between the wide range body and your entry day or the big picture (key econ reports, geo-political events, regular schedule market events et cetera).

    Last of all...when it comes to stock charts...I wouldn't recommend applying candlestick analysis unless its a stock your very familiar with which implies you trade it enough to understand its price action especially how it behaves with the market itself and its fundamentals.

  8. GiaMa


    Thanks a lot to you both: NihabaAshi e Lefty62151 .

    I've tried to read Seiki Shimizu, Gregory Morris and Nison but I'm still not sure in "interpreting" or "recognize" many signals so, asking and talking to someone, is helpful to me.

    And I remember that in this forum I found, even in the past, helpful hints about not only japanese candlestick but technical analysis in general.

    Thanks for these answers and I hope to ask you (and learn from) something else soon!
  9. In my humble experience, I have not found any edge to this pattern called "Hanging Man". Thus I do not trade it.

  10. Neither Nison nor other book authors tell you HOW to trade candlesticks.

    #10     Jun 7, 2005