Two-Line Patterns

See our Patterns Dictionary for other patterns.

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The two-line patterns, as the name implies, are composed of two basic candles (lines). CandleScanner recognizes 36 patterns from this group. Only some of these patterns originate from original Japanese sources. Some western authors introduced new patterns, mainly Greg Morris.

Creating new patterns make sense only when their frequency is high. Otherwise, it is hard to prove theirs statistical significance and use in the real trading.

Patterns from this group can be divided as follows:

  • 14 bullish reversal patterns
  • 14 bearish reversal patterns
  • 2 bullish continuation patterns
  • 6 bearish continuation patterns

Two two-line patterns, the Kicking Up, and the Kicking Down, are exceptional as they can occur in any trend. These two patterns are unique by being formed by two marubozu candles. All other patterns have to occur in a particular market trend (i.e. an uptrend or a downtrend). Among these patterns two characteristic subgroups can be specified:

  • harami patterns, where the body of the first line engulfs the body of the second line
  • engulfing patterns, where the body of the second line engulfs the body of the first line

 

Figure 1.

Figure 1. Two-line patterns.

 

Harami patterns

Following patterns are classified as the two-line harami patterns (harami patterns also exist among the three-line patterns):

Bulkowski and Morris agree in their harami definitions. The first candle's body overlaps, or engulfs the body of the second candle. The second candle's body is significantly smaller than the first one, and the shadows do not matter. Additionally they allow a situation where the opening or the closing prices are equal, but never both at the same time.

In CandleScanner algorithms searching for the harami patterns do not take shadows into account. The only condition is that the first candle's body engulfs the second candle's body.

 

Engulfing patterns

There are following patterns, belonging to the engulfing group:

Again, likewise as with the harmi patterns, Bulkowski and Morris agree in their engulfing pattern definition. They claim that the second candle's body overlaps, or engulfs the body of the first candle. Shadows do not matter. They allow a situation where the opening and closing prices of both candles are equal, but only at the peak or the bottom of the pattern and never on both sides at the same time.

Nison introduces some more complexity, even ambiguity when describing engulfing patterns. We skip his definition in this text for simplicity. However to make the picture clear we need to specify the precise conditions implemented within the CandleScanner application.

In order to consider an engulfing pattern as valid, following requirements have to be satisfied:

  • the second candle's body overlaps, or engulfs, the body of the first candle
  • shadows do not matter
  • trading volume of the second line should be (but does not have to be) higher than the one of the first candle

Additionally:

1 Response

  1. Great website!

    I like Japanese candlestick patterns for many reasons. Especially one- or two-line patterns as they appear very often on the charts. Hence, the statistics may be more reliable.

    The biggest advantage of Japanese candlestick patterns is their simplicity.

    Of course patterns should not be seen as a complete trading strategy in itself. Apart from a decent entry/exit strategy (which makes you a positive expectancy, i.e. you are profitable) you need to have even more decent risk and position management.

    If you may find a market edge in a trading strategy using, for example, a 2-line pattern, and if you eliminate to the minimum other parameters, then you have a chance to be profitable. Of course, it does not mean that we can grab any 2-line pattern and think that we have done our homework. But patterns may be great for a bunch of ideas how to enter/exit the market.

    I’m writing here more from the position of mechanical trading systems rather than discretionary trading (although patterns may be successfully applied by both groups of traders). And there I prefer a simple entry/exit strategy, which eliminates the risk of curve-fitting. For this purpose, candlestick patterns are really great. If you want to have some complexity, put it in your position sizing to squeeze as much as you can from your market edge. But avoid making entry/exit strategy too complex.

    I don’t like to “optimize” and make more profits (in backtesting) by applying oscillators and filters. If I know that 2+2=4 (i.e. a pattern appeared), why should I bother by calculation of some derivatives of prices (i.e. oscillators), to have more or less the same result at the end plus the risk of over-optimization? Applying too many filters is a way to nowhere, or to the curve-fitting, which we should avoid. Instead, you can apply some easier filter based just on prices.

    Last, but not least, Japanese patterns are natural for us, human beings. By just merely looking on the chart, I can see it, feel it, without the necessity to calculate complex formulas. There’s a psychology behind patterns, which is hard to be noticed by calculating a very complex formula.

    The good software is very helpful in terms of being objective. It may help you to see what works, and what doesn’t, to find your market edge. And for that reason I see Candlescanner software and website at least as a great learning tool for the beginners.