Is Candlestick Trading Accurate?
Aug 12, 2022
Beginner traders often get excited when they discover Candlestick trading. The charts offer a lot of information, are color-coded, and seem relatively straightforward to use compared to other trading strategies and techniques. The question is: Is candlestick trading truly an accurate way to boost your trading Odds? Let’s take a look.
Basics
First, if you’re an at-home or beginner trader and have never heard of candlestick trading, take some time to read our blog post on the Harami Cross Pattern (a strategy using candlestick charts) to learn the history and basics of candlesticks.
The shortest version is that candlesticks are thought to predict future swings in security prices based on how they present in the charts. Technical traders will keep an eye out for certain patterns to indicate the impending trends and make buy or sell decisions accordingly.
Here’s a note from Traveda about why traders love candlesticks:
“Candlestick charts rank highly among the most favored and widely used price charts in the market and provide you with valuable information on price movements within a given timeframe. But more than that, a single glance at their color codes, shapes, and patterns show you all that is currently happening in the market.”
We would add that they help with viewing context on how the security or market arrived at the point that is being examined.
Accuracy
The accuracy of a candlestick chart to increase trading Odds is greatly shaped by the various market factors and conditions you trade under, such as timeframe. Different patterns also have different levels of success, like the Harami Cross Pattern we mentioned above. Even more so, what matters is what actually happens after a given candlestick pattern, which can even vary from symbol to symbol. Candlesticks are often not accurate enough for traders to solely rely on (no tool is 100% accurate). However, by combining candlestick patterns with other methods, such as using StockOdds data, trading Odds can be increased. Investopedia lays out a few other factors here as well. Certain Factors of the candlestick charts themselves also affect accuracy! These are:
- Timeframe: The longer the period, the better.
- Security: Some candlesticks work better for different kinds of securities, like large cap liquid stocks versus thinly traded small cap.
- Overall Pattern: Look at the general environment surrounding your perceived signals. The rest of the chart can be telling for why a signal did or did not occur.
- Pattern and Signal Size: A larger pattern may create a more accurate signal.
- Number of Candles: The more candles involved in a pattern, the higher the accuracy.
As mentioned, candlestick charts contain a lot of information and are based on the high, low, open, and close for your selected timeframe. What’s missing, however, are the technical details about the market, such as why the open and close were so similar or different. Spending some effort on evaluating market context will go a long way when it comes to increasing the accuracy. The average success rate of some of the most accurate candlestick patterns comes out to at most, about 55% when used alone.
Up Your Odds
Like most trading strategies, you always want to test your signals with a variety of trading strategies to boost your Odds. Candlestick charts are most useful for tracking past performance, identifying price levels, observing price discovery, price rejection and trends in certain markets. With our Odds Data, you can backtest your pattern with historical data across a variety of securities to make sure you’re reading the candlesticks correctly. We also highly suggest pairing your candlestick trading strategy with other indicators such as Connor’s RSI or Bollinger Bands, and then use our Web Screener to determine your opportunity with expectations of subsequent Performance on Average, Sharpe Ratio and Statistical Odds. Candlestick trading can be an excellent addition to any trading strategy when used correctly.
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