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A frequently asked question about candlestick patterns is how to apply them in a day trading scenario.
Candlestick Reversal Patterns Day Trading
As you may have noticed by now, most candlestick reversal patterns have a short gap somewhere. This is fine on a daily chart, but when you are day trading, there is usually no gap between the candles because the market is not closed.
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Any continuous market like day trading or forex looks different from candlestick because there is no close at the end of the day. So, you usually don’t see gaps in forex charts (except on weekends). Likewise, when you day trade, you won’t see a gap on a 5-minute chart.
It’s simple: empty patterns become empty patterns, and some obvious patterns on the daily chart become obsolete on the day trading chart.
Swallowing patterns are very popular because they are very good at predicting the next directional movement of a stock. There is only one problem with converting this pattern into a daily chart for day trading…
If you are trading daily or on forex charts and you see this pattern at the right place, at the support, then consider it as a swallow pattern. Chances are, it plays like a traditional slot machine.
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Another popular pattern of recessionary inversions is dark cloud cover. This pattern is a highly predictable pattern that usually executes as a bearish reversal (when found at resistance).
Because we don’t have space, the dark cloud cover becomes a complex pattern during the day. Instead, we categorize it as:
Any pattern that trades at least half of the previous day, but not more than the entire candlestick body.
You will notice how small the difference is. If the second candle doesn’t move at least halfway, then by definition we call it a bastard. If it moves more than the full size of the candle, then by definition we now have an absorption pattern.
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Here’s my personal feeling (not a textbook): on a daily chart, dark cloud covers and bastards are basically the same pattern. i
Like the traditional Harami, this pattern can act as a reverse, but it can be equally neutral. As such, it is not as strong as an absorbent model and not as strong as a traditional dark cloud cover.
Morning and evening star patterns are excellent reversal signals. Although both require spaces, converting to a day pattern is fairly simple:
One difficulty that confuses traders is the middle candlestick. The middle light need not be black or white; Both work well. But when there is no space, it can create a slightly different looking image. Here are two versions of the same setup, but with the middle light switching between black and white:
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These two pictures look completely different because there is no gap in the daily chart. On a regular daily chart, the morning star is more obvious because there are gaps. However, both of these revisions are perfectly valid as morning star changes in the day chart.
The evening star is the same principle. Remove the whitespace expectation to define the day-evening star pattern:
The Morning Star and Evening Star patterns are excellent reversal signals in the traditional sense on daily charts, and they are equally good on daily charts. In my experience, both of these patterns are the most reliable intraday reversal signals. These are two patterns you should be familiar with and learn to recognize regardless of the timeframe you trade.
Now that we have covered how to adapt persistent reversal patterns to intraday patterns, let’s take a look at the tweezer pattern problem on intraday charts.
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Tweak models, in general, are a controversial issue. Some people think they are great inversion models and some people think they are not.
The problem is that not all of these patterns yield good signals. I refer to what I call the “ideal pinch model”. These are top or bottom pinches where both bulbs are the same size.
Often when you find the above setups, the tweezers act as a very good feedback signal.
(For a more comprehensive understanding of this issue, you can read my article “How to Correctly Interpret Pizzet Candlestick Patterns”)
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Now let’s see how it is used intraday, since the pinch pattern does not take up space, creating a perfect pinch pattern on the intraday chart is not a problem; This is very easy to do.
If we look at all the models considered in the strict definition, each of them is classified as a pinch.
Now you can see the secret of the tweezers as it relates to day trading. In the purest sense of the pinch definition, all reversal patterns on a daily chart are pinches. This is not a practical explanation.
If we decide to ignore all the pinches on the daily chart, we are left with nothing but a few patterns to choose from. This is probably the easiest solution.
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It can be valuable if you choose to just call the ideal pinch, because a truly ideal pinch is a good reversal signal during the day.
If we use this last approach, we can reduce the reversal of two candles in one day to the following list of only four patterns:
I think simplicity is best. There is a fine line between “ideal tweezers” and “piercing” or “piercing”. To be an ideal tweezer it must be precise. So does what we say matter? I don’t think so.
At the end of the day, the important thing is that you know how to interpret the pattern. With these guidelines, you can easily adapt your positions to your intraday patterns. You can see that there are really only 3 or 4 depending on how you count them. Add to that the morning/evening stars and you have a great set of daytime candlestick reversal signals.
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At this point, you should be able to see how easy it is to convert a traditional “daily” candlestick pattern into a daily candlestick application. Eliminate the need for free space to create adaptations.
Markets Any market that never closes, such as Forex and some futures markets, will benefit from the explanation I have shared with you here.
Even if you don’t plan to become a day trader, learning to recognize these subtle situational differences will make you a better trader. I encourage you to spend some time on this list, write down your notes, and learn to adapt. Your business will thank you one day. The three-bar reversal pattern can easily be adapted for day trading. Combined with other analytics, it provides an excellent entry point for day traders.
Alton Hill from TradingSim, a day trading simulator, wrote about the three-bar reversal pattern for day trading.
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According to Alton Hill, three-lane reversals during the day are very common. To select the best three-bar reversal pattern for day trading, he wants to close the third bar in the pattern above the high of the first two bars.
The chart below shows the difference between a typical three-bar reversal pattern and Alton Hill’s day trading version.
I have included part of the previous section to show the uptrend that ended yesterday. After we entered, the prices went up for the rest of the session.
This is a 5 minute chart of the E-mini Dow contract. Despite solid signal bars, the sample failed immediately after insertion.
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This modified three bar rollback pattern is effective. A simple rule turned this typical model into a great setup.
Using the candle shuffle method, if the 3-bar in the standard 3-bar reversal pattern works best on the 4-bar, mixing the 3-bar and 4-bar will result in this improved 3-bar reversal pattern.
You can easily combine this pattern with other indicators or price patterns and find high probability trade setups. A winning example is the perfect combination of a head and shoulders formation and a three-bar reversal pattern.
However, due to this additional criterion, the signal band (band 3) will have a wider range. Because our stop price is usually on the opposite side of the signal bar, the risk of the trade can be high. We need to reduce the trading volume or if possible, tighten the stop. If you cannot manage the risk, skip setting up the trade.
The Inside Bar Candlestick Pattern
One last thing to note, be very careful if the middle band of the pattern is the outer band. Outside bars are often wild and up front
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