How to Trade on Candlestick Price Bars Alone
To do a good job interpreting candlestick price bars and trading based on that information, you need to understand the dynamic and complex relationships of many patterns all at once, like juggling six oranges rather than three.
If you’re a swing trader, candlesticks are going to be of more interest to you than if you’re a position trader with a very long holding period (weeks and months). The predictive power of a particular bar or pattern of bars may be limited to the next day or next few days.
Like all technical indicators, candlesticks work only some of the time to deliver the expected outcome. Evaluating candlesticks alone, without confirmation from other indicators, is a daunting task.
Tom Bulkowski took on the task of measuring the predictive value of candlesticks. Carefully defining each candlestick and set of candlestick patterns for a total of 103, Bulkowski tested them and found that
69 percent of the candles delivered the outcome expected, such as continuing higher closes following “three white soldiers.”
Only 100 candles or patterns out of 412 combinations got the expected outcome, or 24 percent.
Refining the criteria further to a 66 percent success rate, meaning that the candle works as advertised in two out of three trades, only 6 percent of candles (or 13 candles total) are what Bulkowski calls “investment grade.”
Bulkowski’s findings don’t mean that you can’t find a specific candlestick that works (say) most of the time in your security. A higher incidence of success in candle-reading may be due to other traders in the same security seeing the same candlestick pattern and believing it will work — and so it does.