Unorthodox Japanese Candlestick Patterns Are Powerful, Too

Humans love certainty. The science of Mathematics is a study in absolutes. Investors in the stock market continuously search for the Holy Grail of mathematical certainty – the Sure Thing trade. Unfortunately, the Sure Thing does not exist in the stock market, because the advances and declines in stock and index prices are not the result of mathematical calculations; rather, they are the product of human emotion, which cannot be measured by physical means.

There are tens upon tens of excellent textbooks in print, as well as instructional materials available on the Web, which set forth the basic patterns which are seen and used in Japanese Candlestick technical analysis, together with explanations of their respective predictive capacities. Typically, these illustrations show the standard patterns in their perfect or “classic” forms.

What is seldom, if ever, taught are any of the multitudinous variations upon the perfect forms, and the fact that even imperfect formations do throw off clues about the underlying psychology of the market. Less-than-perfect patterns often do have predictive capacity. One example begins with consideration of the Evening Star pattern, which is a three-bar formation found at the top end of a protracted rise in prices. The first bar in the Evening Star is usually a tall white Candle, which indicates a strong rise in prices for that time period. The second bar (the “Star”) is smaller, at a higher price level than the first. It can be a “Shooting Star,” which looks exactly as you can imagine it should, from its name. The range of price action in the second bar is restrained, and the closing price can be either higher or lower than, or the same as, the opening price. The third bar will be a tall black candle, lower in price range than the second bar, which indicates a strong downward move in prices for that time period. The three bars, together, comprise the Evening Star, which is bearish in its implications.

That’s the Evening Star in its perfect, or classic, form. However, I have found that if two relatively substantial white bars (rather than one) appear before the Star, the entire formation becomes a variation on the Evening Star and does often contain the same bearish predictive implications as the standard form.

The same observation applies at the end of a protracted decline in prices, but in reverse. The result is a variation of the Morning Star; and I have found that this pattern has bullish implications.

Likewise, if the Star (in either the standard three-bar configuration, or in the four-bar variation) is at or very near the tops of its neighbor bars rather than lying above them, even in non-Forex situations, that also constitutes a variation on an Evening Star and is to be respected as containing bearish implications.

A second example which I would like to cite is the rare appearance of a double Doji (or “back-to-back Doji”), the second Doji being at the same price level as the first, situated at the top of a rise or at the top end of range-bound prices. This formation, which to my mind can reasonably be called a variation of a Doji, might possibly be regarded as a pattern all its own. While a Doji is described in the texts as an indication of uncertainty and of a possible change of trend, I am not aware of any reference to a double Doji at the same price level having any greater significance than a single Doji; or, for that matter, any specific reference to back-to-back Doji, at any price level. I would just like to posit the possibility that the second Doji magnifies the significance of the first when their prices are the same, and that the two together, constituting a Double Doji, do have greater significance than one Doji alone.

I have not deliberately spent time searching out examples of such a formation, and one example proves little, if anything. However, one does notice that the great Crash of 1987 was immediately preceded by the appearance of a Double Doji such as described above. Did it mean anything? I’m not prepared to aver that it did; but the disastrous decline in prices which followed is a matter of record in the charts.

The study of Japanese Candlestick patterns is an exercise in judgment, not an exercise in mathematics. Even more does judgment enter the picture when variations of the standard patterns emerge. Perhaps it is time for a textbook to be written on the subject of “Variations in Classic Japanese Candlestick patterns.” The number of possible variations would seem to be infinite; so the textbook might turn out to be very large, or might run to many volumes. Who’s game to take on the assignment?