Better than Candlestick Patterns - Part Two
In Part 1 of this series, we learnt how to read the Close Position, and define each candle as either a High Close, Mid Close or Low Close candle depending on where the candle closed within its own range.
If you missed part 1, you'll find it at the following webpage: http://www.yourtradingcoach.com/Articles-Technical-Analysis/Better-than-Candlestick-Patterns-Part-One.html)
We discovered a simple way to identify the sentiment of the individual candle, as follows:
High Close = bullish sentiment
Mid Close = neutral sentiment
Low Close = bearish sentiment
And we saw how the path taken by price within the candle creates slight variations in the degree of bullish/bearish sentiment.
We now build on our assessment of current price action sentiment, by considering the current close in the context of the previous candle - allowing us to determine the sentiment of the 2-candle pattern.
We define a candle as a Bull Candle, Range Candle or Bear Candle, depending on where price closes with respect to the previous candle’s range.
I call this the Close Comparison.
A Bull Candle is one which closes above the high of the previous candles range. This is demonstrated via (a) to (c) in the examples shown below. Note that all three candles close above the high of the previous candle.
A Range Candle is one which closes within the range of the previous candle. This is demonstrated via (d) to (f) in the examples below. Note that all three candles close within the range of the previous candle.
A Bear Candle is one which closes below the low of the previous candles range. This is demonstrated via (g) to (i) in the examples below. Note that all three candles close below the low of the previous candle.
Let's consider what this means for the sentiment of the 2-candle pattern.
The starting point is simple. We look at the Close Comparison:
Bull Candle = bullish 2-candle pattern sentiment
Range Candle = neutral 2-candle pattern sentiment
Bear Candle = bearish 2-candle pattern sentiment
The Close Position (single candle pattern) will then be considered in order to determine the different degrees of bullishness or bearishness.
So, while (a) to (c) all demonstrate a Bull Candle, and therefore bullish pattern sentiment, there are varying degrees of bullishness in each, which become obvious when adding in the Close Position to the pattern definition.
Candle (a) is what I refer to as a High Close Bull Candle. Both the high close and the bull candle components represent bullishness. Combined, these two indicate strongly bullish sentiment.
Compare this with (b) which shows a Mid Close Bull Candle. Price once again closed above the prior candle, but this time with a neutral close at mid-candle. Although still bullish, sentiment is less bullish than example (a).
In (c) we see a Low Close Bull Candle. Yes, it closed above the previous high, but higher prices were clearly rejected driving price to close near the low of the last candle. We have bullish sentiment (bull candle) combined with a bearish sentiment (low close). This is a weak bullish move.
Combining our close position analysis with our Bull Candle, provides us with varying degrees of bullishness.
The same concept applies for our Range Candles, demonstrated via examples (d) to (f) above. A range candle on its own implies neutral sentiment, but by also considering the Close Position we gain some greater insight into the varying nature of that neutral sentiment.
Looking at (d) for example, we see a High Close Range Candle. The latest candle is a high close candle, closing right on the highs. Individually this appears bullish, but comparing it with the previous candle we see fact that the high close candle is simply retracing approximately 50% of the previous strongly bearish low close candle. Combined, this is probably slightly on the bearish side of neutral.
Likewise with example (f), a Low Close Range Candle; this combination is more on the bullish side of neutral.
While example (e), a Mid Close Range Candle, is clearly neutral with price testing higher and lower twice now before settling closer to mid-range of both candles. Neither side is showing dominance.
A Bear Candle is one which closes below the lows of the previous candle. On the surface, that sounds bearish, but the degree of bearishness will vary when also considering our Close Position analysis.
Example (i) is a Low Close Bear Candle, demonstrating extremely bearish sentiment, as both the Close Position and Close Comparison components imply bearishness.
Contrast that with example (g), a High Close Bear Candle, which has clearly rejected lower prices and closed up at its highs. Still bearish, but showing some sign of bullish orderflow opposing our bearish sentiment. This 2-candle pattern displays weak bearish sentiment.
Whereas example (h) is somewhere in-between, demonstrating a Mid Close Bear Candle. Once again we have some bullish orderflow pushing price off the lows and opposing our bearish sentiment, but to a lesser degree than example (g).
The next step... consider our 2-candle pattern sentiment in the context of current market price action.
More to follow in Part 3...
Part 3 - http://www.yourtradingcoach.com/Articles-Technical-Analysis/Better-Than-Candlestick-Patterns-Part-Three.html
Part 4 - http://www.yourtradingcoach.com/Articles-Technical-Analysis/Better-than-Candlestick-Patterns-Part-Four.html
Part 5 - http://www.yourtradingcoach.com/Articles-Technical-Analysis/Better-than-Candlestick-Patterns-Part-Five.html