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Candlestick patterns
Working definition
Candlestick patterns are named arrangements of one or more candles — their bodies, wicks and closes — read as signs of what price may do next.
Candlestick patterns give names to the shapes candles make: a body and its wicks, a close high or low in the bar’s range, a sequence of two or three candles read together. Each name carries a reading of what price may do next, and the reading is what a trader acts on.
The measurement is whether a pattern predicts more than its own geometry. The wick-rejection note found an effect that a volatility-matched surrogate reproduced: real, and meaning nothing. Does a wick rejection mean anything? measured a common candle reading, the long wick taken as a sign that price was refused at a level.
The split it found was large: the absorption rate at wick-touched levels ran 8% against 46% for levels reached by a close, at z = 198. Bars with long wicks reach further, so they touch more distant levels and produce a different mix of outcomes. A surrogate matched only on volatility and wick length, with no participants and no intent in it, reproduced the difference. The belief that a wick rejected the level because buyers stepped in sits on the refutation index as misleading.
The same note found a quieter problem underneath. Counting a level as reached when any part of a bar crosses it gives roughly twice as many events as counting only closes beyond it, so the choice of reach rule can halve or double the sample a pattern study rests on before any pattern is judged.
Smart money concepts (SMC) read the same wicks through a story about institutions, and the surrogate question is the same one there. What a candlestick pattern cannot carry on its shape alone is a statement about who traded or why. This entry lists no pattern to trade and states no success rate, and every figure it quotes is the wick note’s own.
Commonly confused with
Neighbouring concepts that get used interchangeably, and the distinction that actually separates them.
- Price action
Candlestick patterns are one vocabulary within price action, the named shapes. Price action reads the whole chart, whether or not a shape has a name.
- Rejection block
A rejection block is an ICT zone drawn from a swing candle's wick, between the body and the wick's tip, and expected to be refused again. A candlestick pattern is the named shape of one or more candles, read as a sign of what price may do next.
- Candle range theory (CRT)
Candle range theory reads one higher-timeframe candle's range and the next candle's excursion beyond it. Candlestick patterns name the shapes of the candles themselves.
How to measure it in your own data
A definition you cannot test is a definition you have to take on trust. This is the shortest honest route from the concept to a number you computed yourself.
- Records you need
Every occurrence of the pattern you trade, with what price did next, and the volatility and wick lengths of the same bars.
- What you compute
Build a surrogate matched on volatility and wick length that contains no participants and no intent, then compare the pattern's outcome split with the surrogate's.
- What the answer tells you
If the surrogate reproduces the split, the pattern's effect is its geometry: real, and saying nothing about intent. Only an effect the surrogate cannot reproduce says something about the pattern itself.
Questions and answers
What are candlestick patterns?
Names given to the shapes one or more candles make on a chart, read from how the bodies, wicks and closes sit against each other. Each name carries a reading of what price may do next, and that reading is the part a trader acts on and the part that can be measured.
Are reversal candlestick patterns reliable?
A pattern is as reliable as its record against a fair comparison. For the long-wick reading that many reversal patterns rest on, the fair comparison was a surrogate with the same volatility and wick length, and it reproduced the effect, so the bar's shape carried it rather than a reversal.
Are candlestick patterns useful for trading?
A pattern is useful to the degree it predicts more than its own geometry. That is measurable: compare the pattern's outcomes with a surrogate that shares its shape and none of its supposed cause.
Does a pin bar or rejection candlestick mean anything?
A pin bar, a candle with a long wick and a small body, is read as price refused at a level. The wick-rejection note measured that reading: bars with long wicks reach further, so they touch more distant levels, and a surrogate matched only on volatility and wick length reproduced the whole difference in outcomes. The refusal it appears to show is the bar's geometry.
Related terms
Derived from the links this entry makes and the entries that link back to it.