Beginner traders often get excited when they discover Candlestick trading. The charts offer a lot of information, are color-coded, and seem relatively straightforward to use compared to other trading strategies and techniques. The question is: Is candlestick trading truly an accurate way to boost your trading Odds? Let’s take a look.
Basics
First, if you’re an at-home or beginner trader and have never heard of candlestick trading, take some time to read our blog post on the Harami Cross Pattern (a strategy using candlestick charts) to learn the history and basics of candlesticks.
The shortest version is that candlesticks are thought to predict future swings in security prices based on how they present in the charts. Technical traders will keep an eye out for certain patterns to indicate the impending trends and make buy or sell decisions accordingly.
Here’s a note from Traveda about why traders love candlesticks:
“Candlestick charts rank highly among the most favored and widely used price charts in the market and provide you with valuable information on price movements within a given timeframe. But more than that, a single glance at their color codes, shapes, and patterns show you all that is currently happening in the market.”
We would add that they help with viewing context on how the security or market arrived at the point that is being examined.
Accuracy
The accuracy of a candlestick chart to increase trading Odds is greatly shaped by the various market factors and conditions you trade under, such as timeframe. Different patterns also have different levels of success, like the Harami Cross Pattern we mentioned above. Even more so, what matters is what actually happens after a given candlestick pattern, which can even vary from symbol to symbol. Candlesticks are often not accurate enough for traders to solely rely on (no tool is 100% accurate). However, by combining candlestick patterns with other methods, such as using StockOdds data, trading Odds can be increased. Investopedia lays out a few other factors here as well. Certain Factors of the candlestick charts themselves also affect accuracy! These are:
- Timeframe: The longer the period, the better.
- Security: Some candlesticks work better for different kinds of securities, like large cap liquid stocks versus thinly traded small cap.
- Overall Pattern: Look at the general environment surrounding your perceived signals. The rest of the chart can be telling for why a signal did or did not occur.
- Pattern and Signal Size: A larger pattern may create a more accurate signal.
- Number of Candles: The more candles involved in a pattern, the higher the accuracy.
As mentioned, candlestick charts contain a lot of information and are based on the high, low, open, and close for your selected timeframe. What’s missing, however, are the technical details about the market, such as why the open and close were so similar or different. Spending some effort on evaluating market context will go a long way when it comes to increasing the accuracy. The average success rate of some of the most accurate candlestick patterns comes out to at most, about 55% when used alone.
Up Your Odds
Like most trading strategies, you always want to test your signals with a variety of trading strategies to boost your Odds. Candlestick charts are most useful for tracking past performance, identifying price levels, observing price discovery, price rejection and trends in certain markets. With our Odds Data, you can backtest your pattern with historical data across a variety of securities to make sure you’re reading the candlesticks correctly. We also highly suggest pairing your candlestick trading strategy with other indicators such as Connor’s RSI or Bollinger Bands, and then use our Web Screener to determine your opportunity with expectations of subsequent Performance on Average, Sharpe Ratio and Statistical Odds. Candlestick trading can be an excellent addition to any trading strategy when used correctly.
Start Trading with Odds
Get access to the Seasonality Almanac Dashboard, as well as 1 basic course, for free!
Try for Free
FAQs
Candlestick patterns can help understand trader sentiment over trading periods. There is no "most accurate" pattern as they should all be viewed as indicators of what bull or bear traders might be thinking—but some traders have preferences and act on specific patterns.
How effective is candlestick trading? ›
A major advantage, provided by candlestick signals, is the high probability of identifying a change of investor sentiment/price trend. AND the probabilities can be improved by adding indicators that enhance those probabilities. A very powerful trend indicator is the T line.
Are candlesticks enough for trading? ›
Today, candlesticks are used widely in the financial markets by both short-term traders and investors. They are usually ideal because they provide more details. For example, a line chart shows either the closing or opening prices while renko ignores the important time factor of an asset.
Does candle really work in the stock market? ›
Candlestick charts are useful for technical day traders to identify patterns and make trading decisions. Bullish candlesticks indicate entry points for long trades, and can help predict when a downtrend is about to turn around to the upside.
How often are candlestick patterns correct? ›
The average success rate of some of the most accurate candlestick patterns comes out to at most, about 55% when used alone.
What is the 3 candle rule? ›
It consists of three successive candlesticks – the first is long and bearish and is followed by a smaller bullish bar that is completely engulfed by the first one. The third candle is bullish and closes above the second candle's high, suggesting a potential shift from a downtrend to an uptrend.
Do professional traders use candlesticks? ›
Traders use the candlesticks to make trading decisions based on irregularly occurring patterns that help forecast the short-term direction of the price.
What is the most successful candlestick pattern? ›
There are various types of candlestick patterns which can signal bullish or bearish movements.
- Head and Shoulders Pattern.
- Inverse Head and Shoulders Pattern.
- Three White Soldiers.
- Three Black Crows.
- Falling Three Pattern.
- Rising Three Pattern.
- Bearish Checkmate Pattern.
- Bullish Checkmate Pattern.
Candlestick patterns are widely accepted but can sometimes misuse by unqualified people to glamorise their accuracy in predicting the price trend also known as confirmation bias.
Is candlestick trading profitable? ›
Candlestick patterns are a popular tool used by traders to analyze market trends and make investment decisions. However, relying solely on candlestick patterns is not a guarantee of success in trading, as it does not take into account all the various factors that influence market movements.
Candlestick chartsare one of the most reliable tools in technical analysis that you use to predict the stock price movement. The combination of certain charts patterns or even a few single candles is enough or you can say are reliable to know the trend in the market.
Why don't candlestick charts work? ›
Keep in mind, however, that candlestick charts only represent the relationship between the open and close on a single trading day; they don't give you insight into the events that transpired throughout the trading day itself. There is no insight on volatility.
How to predict the next candlestick? ›
A hammer is formed at the end of the downtrend. This candlestick indicates that the sellers have had selling pressure, but buyers won the game by pushing the price upwards. After the formation of the hammer, the next candlestick could be a green candle.
What is the candle stick strategy? ›
A candlestick pattern strategy will see a trader take note of what the individual candlesticks are doing. They will then make decisions about whether the candlesticks are forming particular patterns which could indicate a certain price behaviour, such as a market reversal.
What is the rarest candlestick pattern? ›
The rarest candlestick pattern is often considered the "Abandoned Baby." This pattern is a reversal indicator characterized by a gap followed by a Doji, which is a candle with a small body, and then another gap in the opposite direction.
Which candle is best for trading? ›
In fact, we have distilled the Japanese candlestick patterns down to the top 7 that are easy to spot and offer excellent signals.
- The Hammer Candlestick Pattern. One of the most popular candlestick patterns is the Hammer. ...
- Bullish and Bearish Engulfing. ...
- Shooting Star. ...
- The Doji. ...
- Inside Bar. ...
- Key Reversal. ...
- Morning/Evening Star.
The success rate of candlestick patterns can vary depending on the pattern but generally hover around 54-60%. The most successful is the Inverted Hammer, which has a 60% success rate. It also has an average profit potential of 1.12% per trade.
How useful are candlestick patterns? ›
A candlestick is a way of displaying information about an asset's price movement. Candlestick charts are one of the most popular components of technical analysis, enabling traders to interpret price information quickly and from just a few price bars.
