Top-Performing Reversal Candles by Thomas Bulkowski
Three candle patterns outperform all others. Can you guess
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.
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?