Chart Patterns  |  AUG 2004

Strength-Rated Candlestick Patterns by Mitch E. Mulhall

Strength-Rated Candlestick Patterns by Mitch E. Mulhall Perfectly formed candlestick patterns are not common. By ordering the criteria for a candlestick pattern from most important to least important, you can rate pattern strength by the number of criteria met. The criteria for a candlestick pattern may seem prescriptive, but a given pattern may require a series of subtle qualifications. This is particularly true of multiplecandlestick patterns. By carefully ordering the qualities of a pattern, you can determine a strength factor that can add perspective to your candlestick analysis. Strength-rated candlestick patterns require charting software equipped with a formula language that supports “string plots” — strings plotted vertically above or below a candlestick — and is capable of allocating local variables as study parameters. To illustrate rating pattern strength, I will outline several helpful pattern recognition concepts used to identify a hammer, which is a simple, single-candlestick pattern. Then I will show you how to create a formula that will add a strength factor to hammer identification. While this article focuses on the hammer pattern, the technique can be applied to any candlestick pattern. TERMS If you are not familiar with candlesticks, there are two terms you should understand: • Body: The difference between the high and the low • Real body: The absolute value of the difference between the last and the open.

by Mitch E. Mulhall