Coding Candlesticks by Victor Likhovidov
Japanese candlestick charting is a popular method with which to visualize market price dynamics. Usually, candlestick charting is used in concert with other indicators to gauge market activity, but as a quantitative approach, technical analysis would be best served with quantitative rules for reading candlestick charts. Here’s a simple method by which to assign digital codes to candlesticks. You’ll see that the codes agree with the basic principles of technical analysis and may be used to construct a class of new indicators. My coding scheme is built on the common interpretation of candlestick charts. In particular:
The color of the candlestick is its most important characteristic, so it has the highest weight in the code. White candles are bullish and black candles are bearish.
The opening and closing prices of the candlestick are the most important of its four levels (open, high, low,close), and this is reflected in that the size of a candlestick’s body corresponds to the positions of the binary code directly after its color.
The weight of each candlestick’s element (body, upper shadow, lower shadow) depends on its size.