Compressing Candlestick Patterns
by Jean-Olivier Fraisse and Kevin D. Armstrong
Market action is similar to territorial claims between competing species in that bulls seek to expand
their territory by increasing prices and, conversely, bears seek to expand their territory by decreasing
prices. Candlestick charting depicts the ongoing struggle and provides valuable insights about the
never-ending battle (see sidebar, "Drawing candlesticks"). In particular:
-A candle body measures the territory held by the bulls(white candle body) or the bears (black
candle body) from the beginning to the end of the corresponding period.
-The shadows of the candle form represent probes into enemy territory in an attempt to outflank or
encircle it. An upper shadow is a failed attempt by the bulls to expand their territory at the expense
of the bears; since the closing price is below the high of the period, part of the ground gained by the
bulls is subsequently lost to the bears. A long upper shadow is thus possible evidence of weakening
bulls. Similarly, a lower shadow is a failed attempt by the bears to trap the bulls.
-Body and shadows should be seen as a whole, and individual candlesticks, which depict the
outcome of a single bout between bulls and bears, should be viewed in relation to surrounding
candlesticks. The two ways to analyze the parts as a whole is to combine (or compress) individual
candlesticks into a single summary candlestick or to identify standard candlestick patterns deemed
of predictive value.