One of the more common questions I am often asked is “Which candle patterns are the most powerful?”
This is always an interesting question and no matter how many times I’m asked it still makes me think. Candlestick charting traders always seem to have candlestick patterns and turning points that work best for them, maybe because those are the ones that they are typically searching for. I know I have my favorite candlestick patterns, but will trade any pattern that offers a good setup (See my recent article on 4 advantages of candle stick charts).
Logic would suggest that the most dynamic patterns are the ones that show the largest change in market psychology. Therefore, you would expect that a Bearish Engulfing Pattern would be more dynamic than Dark Cloud Cover Pattern. I have not found this to be the case. The candlestick chart setup is as important as the candlestick pattern that is showing the turning point. For example, a large Bearish Engulfing Pattern means very little to me if it’s not at some type of resistance whether it’s a prior high for a Fibonacci retracement level. Conversely, a candlestick pattern that just squeaks out a Dark Cloud Cover at a strong resistance level could be a great setup for short trade.
I have also heard people argue that a candlestick pattern that takes several days to build such as a Morning Star pattern is more reliable than a single candlestick pattern such as a Hammer. Again, I have not found this to be true although I do understand why a trader would think this way. The logic would be similar to having a nice base being built on a stock chart or any market for that matter. I still find the chart setup to be of primary importance. One thing you might notice in some markets is less of a propensity to see a retracement back into the pattern on multiple candle patterns such as a Morning Star or Evening Star. The multiple candle patterns sometimes relieve the force in the market and allow the market to reverse without this retracement. Oftentimes a single candle pattern such as a Hammer needs to work off the market’s momentum and we are very likely to see a retracement towards the middle of the candlestick pattern.
We always have to keep in mind that candlestick patterns do not give targets. A Morning Star does not run farther than the move of a Hammer. It’s all dependent on the candlestick chart setup. I really don’t believe that you can classify one candlestick pattern being more potent than another without seeing the chart as a whole. Traders develop favorite patterns that worked well for them in the past, as well as chart setups that work well with their trading methodology.
New to candlestick charts? Check out Steve’s FREE video introduction on Candlestick Charting here.