How do you determine if a candle acts as a reversal or a continuation pattern? I tested three methods and checked the results visually using hundreds of candles. I chose the best method. Two were variations of an exponential moving average (
the price trend) compared to the closing price over time. They were not as accurate or as simple as just looking for the breakout to determine reversal or continuation, success or failure.
An upward breakout occurs when price closes above the top (highest high) of the candle. A downward breakout occurs when price closes below the bottom (lowest low) of the candle. Marry the breakout direction with the price trend leading to the candle and you get either a reversal or a continuation of the prior trend. This is the same method I used with chart patterns. It’s simple.
Candle Performance
How do you measure candle performance? Since
candlestick patterns often lead to short-term moves, I used the closest minor high or low (swing high or swing low), depending on the breakout direction, to gauge performance. The straight-line move often isn’t a long one, but it serves as a good proxy of what you can expect. The statistics in this book should be used to compare results from candle to candle, not as benchmarks of how well you will do trading candles.
