The Art & Science of
Active Trend Trading
Candlesticks—Discoveries
Probability of Success
Aug 6, 2016
U.S. Government Required Disclaimer – Commodity Futures Trading Commission Futures
and Options trading has large potential rewards, but also large potential risk. You must be aware
of the risks and be willing to accept them in order to invest in the futures and options markets.
Don’t trade with money you can’t afford to lose. This is neither a solicitation nor an offer to
Buy/Sell futures or options. No representation is being made that any account will or is likely to
achieve profits or losses similar to those discussed in this training. The past performance of any
trading system or methodology is not necessarily indicative of future results.
CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN
LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT
REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE
RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN
MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN
GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF
HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY
TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
All Materials presented are for training purposes only . Traders should paper trade any new method
prior to risk of personal capital.
All Materials Copyrighted ATTS 2007-2016
Disclaimer
Candlestick History
Charting method originating In Japan between the 18th century & late 1800’s
Potentially used by Japanese Rice Traders
Introduced to Western Traders by Steve Nison in the 1990’s
Knowledge base and trading importance expanded by Steve Bigalow
Probability Studies By Thomas Bulkowski
What’s the Difference?
Bar Chart vs Candlesticks
Open
OpenClose
Close
Bullish Bearish
Low
High
Primary & Best Candlestick Signals
There are many, many Candlestick Patterns but these represent the Primary & Best, but do they
Indecisive
Doji's/Spinning Tops - Yes but are not trading triggers, 50-50
Bullish Bearish
Hammer Shooting Star
Engulfing Patterns -- Minor Lows ** Engulfing Patterns
Piercing Line Dark Cloud
** Morning Star Evening Star
Harami 50-50 Chance Harami 50-50 Chance
Inverted Hammer- Actually Bearish Hanging Man – Actually Bullish
Wicks, Size and Color Order
Golden Rule of Candlesticks
Candlesticks and patterns require four criteria for
proper interpretation:
1. A Completed Line (Must wait for the time period to finish!)
2. Location, Location, Location
3. Color
4. Shape, Size & Wicks
Revised Candlestick Basics
Candles and Technical Analysis go together
Powerful Tools – Only partially understood by most traders
When do candlestick patterns work best? Within established Trends
Size and Color Matters
Wicks Matter
Gaps are amazing
Bearish Candles outperform Bullish Candles
Focus on Patterns with 65% or better probabilities of success
Patterns tend to be valid for 5-10 days
2 & 3 Day Patterns have higher probability of success
Presentation Material by: Active Trend Traders
- Above the stomach – Like a Morning Star Reversal 67%- Belt hold bearish and bullish – 67% - 71%- Deliberation – Bullish Continuation 77%- Doji star, bearish – To Be Bullish close to 70%
- Engulfing, bearish – To Be Bearish 79%- Last engulfing bottom and top – Bearish at the Bottom- Three outside up and down – Bearish at tops 69%, Bullish
75% at bottom- Two black gapping candles – Bearish Continuation 68%- Rising and falling windows – Rising Bullish 75%; Falling
Bearish 67%
- Bulkowski, Thomas N.. Encyclopedia of Candlestick Charts (Wiley Trading) (Kindle Locations 1295-1304). Wiley. Kindle Edition.
Highest Probability Patterns
- Above the Stomach
- Theoretical: Bullish reversal.
- Actual bull market: Bullish reversal 66% of the time (ranking 17).
- Actual bear market: Bullish reversal 67% of the time (ranking 18).
- Frequency: 32nd out of 103. Overall performance over time: 31st out of 103.
- Bulkowski, Thomas N.. Encyclopedia of Candlestick Charts (Wiley Trading) (Kindle Locations 2739-2744). Wiley. Kindle Edition.
Highest Probability Patterns
- Belt Hold – Bullish and Bearish
- Theoretical: Bearish reversal.
- Actual bull market: Bearish reversal 68% of the time (ranking 16).
- Actual bear market: Bearish reversal 69% of the time (ranking 17).
- Frequency: 19th out of 103.
- Overall performance over time: 63rd out of 103.
- Bulkowski, Thomas N.. Encyclopedia of Candlestick Charts (Wiley Trading) (Kindle Locations 3242-3248). Wiley. Kindle Edition.
Highest Probability Patterns
- Belt Hold – Bullish and Bearish
- Theoretical: Bullish reversal.
- Actual bull market: Bullish reversal 71% of the time (ranking 11).
- Actual bear market: Bullish reversal 71% of the time (ranking 14).
- Frequency: 22nd out of 103.
- Overall performance over time: 62nd out of 103.
- Bulkowski, Thomas N.. Encyclopedia of Candlestick Charts (Wiley Trading) (Kindle Locations 3401-3406). Wiley. Kindle Edition.
Highest Probability Patterns
- Deliberation – Bullish Continuation
- Theoretical: Bearish reversal.
- Actual bull market: Bullish continuation 77% of the time (ranking 2).
- Actual bear market: Bullish continuation 75% of the time (ranking 4).
- Frequency rank: 48th out of 103.
- Overall performance over time: 93rd out of 103.
- Bulkowski, Thomas N.. Encyclopedia of Candlestick Charts (Wiley Trading) (Kindle Locations 4475-4481). Wiley. Kindle Edition.
Highest Probability Patterns
Bullish continuation
Bearish Reversal
- Doji Star – Bearish
- Theoretical: Bearish reversal.
- Actual bull market: Bullish continuation 69% of the time (ranking 8).
- Actual bear market: Bullish continuation 67% of the time (ranking 11).
- Frequency: 43rd out of 103.
- Overall performance over time: 51st out of 103.
- Bulkowski, Thomas N.. Encyclopedia of Candlestick Charts (Wiley Trading) (Kindle Locations 5785-5791). Wiley. Kindle Edition.
Highest Probability Patterns
Bearish Engulfing
Resistance
Theoretical: Bearish reversal.
Actual bull market: Bearish reversal 79% of
the time (ranking 5).
Actual bear market: Bearish reversal 82% of
the time (ranking 5).
Frequency: 11th out of 103.
Overall performance over time: 91st out of
103.
Bulkowski, Thomas N.. Encyclopedia of Candlestick
Charts (Wiley Trading) (Kindle Locations 6502-6507).
Wiley. Kindle Edition.
Swing Low
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Bearish Engulfing
Bearish Engulfing
Clue: Divergent Stochastics
12.8%+ Gain from Signal to High in 6 weeks
What are the Clues?
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- Last Engulfing Bottom
- Theoretical: Bullish reversal.
- Actual bull market: Bearish continuation 65% of the time (ranking 14).
- Actual bear market: Bearish continuation 67% of the time (ranking 12).
- Frequency: 13th out of 103.
- Overall performance over time: 48th out of 103.
- Bulkowski, Thomas N.. Encyclopedia of Candlestick Charts (Wiley Trading) (Kindle Locations 9431-9436). Wiley. Kindle Edition.
Highest Probability Patterns
- Last Engulfing Top
- Theoretical: Bearish reversal.
- Actual bull market: Bullish continuation 68% of the time (ranking 9).
- Actual bear market: Bullish continuation 67% of the time (ranking 14).
- Frequency: 14th out of 103.
- Overall performance over time: 79th out of 103.
- Bulkowski, Thomas N.. Encyclopedia of Candlestick Charts (Wiley Trading) (Kindle Locations 9592-9597). Wiley. Kindle Edition.
Highest Probability Patterns
- Three Outside Up
- Theoretical: Bullish reversal.
- Actual bull market: Bullish reversal 75% of the time (ranking 9).
- Actual bear market: Bullish reversal 74% of the time (ranking 8).
- Frequency: 24th out of 103.
- Overall performance over time: 34th out of 103.
- Bulkowski, Thomas N.. Encyclopedia of Candlestick Charts (Wiley Trading) (Kindle Locations 14950-14955). Wiley. Kindle Edition.
Highest Probability Patterns
- Three Outside Down
- Theoretical: Bearish reversal.
- Actual bull market: Bearish reversal 69% of the time (ranking 15).
- Actual bear market: Bearish reversal 70% of the time (ranking 16).
- Frequency: 21st out of 103.
- Overall performance over time: 39th out of 103.
- Bulkowski, Thomas N.. Encyclopedia of Candlestick Charts (Wiley Trading) (Kindle Locations 14804-14810). Wiley. Kindle Edition.
Highest Probability Patterns
- Two Black Gapping Candles
- Theoretical: Bearish continuation.
- Actual bull market: Bearish continuation 68% of the time (ranking 10).
- Actual bear market: Bearish continuation 69% of the time (ranking 9).
- Frequency: 29th out of 103.
- Overall performance over time: 10th out of 103.
- Bulkowski, Thomas N.. Encyclopedia of Candlestick Charts (Wiley Trading) (Kindle Locations 16077-16082). Wiley. Kindle Edition.
Highest Probability Patterns
Rising Windows
Swing High
Theoretical: Bullish continuation.
Actual bull market: Bullish continuation
75% of the time (ranking 4).
Actual bear market: Bullish continuation
72% of the time (ranking 7).
Frequency: 20th out of 103.
Overall performance over time: 42nd out
of 103.
Bulkowski, Thomas N.. Encyclopedia of Candlestick
Charts (Wiley Trading) (Kindle Locations 17128-
17133). Wiley. Kindle Edition.
Gap up
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Rising Windows
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Rising Windows
13%+ Gain from Signal to High in 4 Weeks
Rising Window
Clue: Stochastics Oversold
What are the Clues?How Many Are Needed?
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Falling Window
Swing Low
Theoretical: Bearish continuation.
Actual bull market: Bearish continuation 67% of
the time (ranking 11).
Actual bear market: Bearish continuation 73%
of the time (ranking 6).
Frequency: 23rd out of 103.
Overall performance over time: 7th out of 103.
Bulkowski, Thomas N.. Encyclopedia of Candlestick
Charts (Wiley Trading) (Kindle Locations 17029-
17034). Wiley. Kindle Edition.
Gap Down
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Falling Window
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Falling Window
-19%+ Gain from Signal to 100 day SMA in 26 days
Falling Window
Clue: Stochastics Divergence
What are the Clues?How Many Are Needed?
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- Bearish Reversals work best in a prevailing Downtrend on Pullups
- Bullish Reversals work best in a prevailing Uptrend on Pullbacks
Other Considerations
- Highest Probability Trades take place reactions during a Trend
- Other Highest Probability Trades take place at the bottom/top of consolidation
- Wicks
- Size & Color
- Gaps
Other Considerations
- Wicks: Long Shadows and Tails tell exactly where buyers or sellers are coming in to the trade
Other Considerations
Location LocationLocation Location
Location
- Size & Color: Larger candles are move predictive than Small Candles- Color change from Red to big Green candle- Color Change from Green to big Red Candle
Other Considerations
Big Red Followed by Green
Green Followed by Big Red
Big Red Followed by Green
Big Red Followed by Green
Green Followed by Big Red Green Followed by
Big Red
Other Patterns I Like
Morning Star—Two Day Pattern
Hammer Support
Swing High Only occurs after a downtrend.
Body inside previous days candle
2nd up day closes at least ½ way up
candle from 2 days prior
Expected move back to swing high,
trend lines or moving averages
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Morning Star
11%+ Gain from Signal to High in 2 Weeks13%+ Gain from Second Signal in 2 Weeks
Morning Star
What are the Clues?How many do we need?Does the Morning Star
really matter?
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Bullish Engulfing—Two Day Pattern
Only occurs after a downtrend. Completely
engulfs the previous days body.
Expected move back to swing high, trend lines
or moving averages
Support
Swing High
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Bullish Engulfing
Bullish Engulfing
Clue: Divergent Stochastics
12.8%+ Gain from Signal to High in 6 weeks
What are the Clues?
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Piercing Line
Support
Only occurs after a downtrend. Must
open below and close more than ½
way up preceding candle.
Expected move back to swing high,
trend lines or moving averages
Swing High
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Piercing Line
70%+ Move from Signal to High in 2 Months
Piercing Line
Clue: Oversold Stochastics
What are the Clues?
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Dark Cloud
ResistanceOnly occurs after a uptrend. Must
open above and close more than ½
way down preceding candle.
Expected move back to swing low,
trend lines or moving averages
Swing Low
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Dark Cloud
-9% Drop from Signal to Low in 2 days
Dark Cloud
Clue: Weak Stochastics
What are the Clues?
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