Quantification of Candlestick Patterns !!!

10 апр. 2022 г.

█  DISCLAIMER

Are you looking for an answer for Best Quantification of Candlestick Patterns? you are not going to get here. It's just my thoughts about an indicator built on this concept that will be published next month (because I can only post two public indicators per month). Felt to discuss this with the community before head because I am excited to know your view on this. To make it better.

█  OVERVIEW

Thirty-seven different Candlestick Patterns are available in All Patterns Tradingview Indicator + The Boring Candle indicator totalling 38.

█  QUESTIONS FOR THE READERS

• How many of you know about them and how to trade them?
  
• Do you feel Candlestick Patterns are reliable?
  
• If reliable, why do traders attach some trend rules to trade? If they already built based on trends? (In the above indicator, also we have the option of "Detection trend based on" option you can observe)
  
• Do you feel other candles not labelled in the above indicator are not telling any story about the price movement? If not, why are we not naming new names?
  

I am not answering the above questions. There are so many posts with mixed opinions on the above questions.

Yes, I know I am questioning an idea that has existed for more than one century. I respect the knowledge passed down to us to improve the work is our responsibility. That is a crucial role of the researcher.

█ QUANTIFICATION OF CANDLESTICK PATTERNS?

Here, quantification means mapping a candlestick pattern to a number or ratio specks about the trend. A basic example of Quantification is the Probability of a Bull Market i.e.

Bull (Green Candle) → 1
Neutral (Boring Candle) → 0.5
Bear (Red Candle) → 0

Here 0, 0.5 and 1 are quantification based on Candles to tell the Probability of a Bull Market.

Yes, these are not Candlestick patterns we are taking, but I feel you understand my proposal to deal with candlestick patterns.

Let's talk about another example using Heiken Ashi Candles, and the same Quantification is the Probability of a Bull Market.

Strong Bull (Green Candle with only upper wick) → 1
Weak Bull (Green Candle with both wicks and not Neutral) → 0.75
Neutral (Doji or spinning top candles) → 0.5
Soft Bear (Red Candle with both wicks and not Neutral) → 0.25
Strong Bear (Red Candle with only lower wick) → 0

I hope you understand the meaning of quantification better now.

Now my idea is why can't we build a quantification system for general candlestick patterns based on position, volume, and other parameters (Your limit is your imagination !!!). Instead of using the same knowledge from the century, why can't we transform it into some oscillator and put the learning into actual work in trading.

This is my attempt to brush some pine scripters to work on this. I share my work too soon.

█ BENEFITS

• Since we are talking about candlestick patterns, there is a delay in picking trends, maybe two candles if you are looking at two bar play. which is significantly less when compared to conventional indicators like MACD, RSI, Moving Average etc.,
  
• With the above discussed "Probability of a Bull Market" with some higher timeframe averages using Rolling OHLC and Rolling Heikin Ashi candles I published, I build a clean indicator that looks similar to RSI but is efficient in finding Over Bought and Over Sold Regions. Creating an oscillator based on candlestick patterns with more sensitive quantification than the proposed simple methods may lead to better trade trends than existing indicators. We can use volume, Price and candlestick patterns to obtain more trend related oscillators.
  

█ MY FINAL THOUGHTS

• Maybe I am overthinking (I am a PhD Statistics Research Scholar. This is my bad habit). Ignore the idea if you feel this observation is not realistic. Wait till next month to get to know what I am talking about.
  
• I am bad at referring to books and indicators. If there is already any concept like this, please enlighten me. I am happy to acknowledge their thoughts. If you have built any indicators already, please share them in the comments section.
  

If I am the first person talking about this, Kudos to me...

█ REFERENCES

All thoughts are from my head, so there are no references for this post.

Stay Tuned...

If you have any recommendations or alternative ideas, then please drop a comment under the script ;)

Happy Trading