Chart Patterns  |  JUN 2008

Top-Performing Reversal Candles by Thomas Bulkowski

Top-Performing Reversal Candles by Thomas Bulkowski Three candle patterns outperform all others. Can you guess which ones? During research for my latest book, Encyclopedia Of Candlestick Charts, I explored the world of candlesticks and found which ones worked and which ones didn’t. In this article, I take a closer look at the methodology I used and discuss three candle patterns that work exceptionally well. METHODOLOGY I spent a lot of time trying to figure out how to test short-term price patterns and found a method I believe works best. For a candlestick that acts as a reversal, price should enter the candle from one direction and exit it in the opposite direction. For example, a bearish harami has price rising into the candlestick pattern, by definition. In order for the candle to act as a reversal, price must exit downward. What is meant by exit? I used a close either above the top (highest high) or below the bottom (lowest low) of the candle pattern to determine the exit trend. The logic behind this designation is that a candle that is supposed to act as a reversal should cause price to reverse immediately, not next week or next month, and have a lasting effect. It does no good if price reverses by dropping a penny the next day before rising again thereafter. This breakout definition shows both force of the move and the direction. THE BEST REVERSALS What are the best reversal candles of the 103 types I looked at? In a bull market, “three stars in the south” wins the prize by working best as a reversal 86% of the time. I’ll bet you’ve never heard of that one, have you?

by Thomas Bulkowski