Blended candlesticks

We can ‘blend’ different adjacent candlesticks to form a single candlestick, thus summarizing the outcome over several periods in one candle. We can blend candles of similar frequency over any time scales, for example, minute-by-minute candles, hour-by-hour candles or day-by-day candles. You can blend as many adjacent candles as you see fit. In effect, by doing this you get a clearer insight into the evolution of market activity over longer time periods. Why would we want to do this? Well, first of all, blended candles can create a single, stronger signal. Secondly, by blending candles, you eliminate market noise, thereby getting a more accurate reflection of the underlying activity. Finally, continually watching individual candles play-out over short-time periods creates stress which can, and frequently does, result in prematurely stopping out/exiting positions; this can result in losses or less profit taking than originally targeted.

The importance of the last point cannot be understated. The psychological aspect, reacting to short-term patterns, plagues most investors. Analyzing groups of blended candles enables us to keep a focus on our trading plan, thereby restraining the emotional reaction arising from adverse short-term price movements. In other words, it helps us not to get caught-up in the noise and to stick to our original trading plan, waiting for stops or targets to be reached, as set at the beginning of the trade.

So, how does blending work? Very simply: first we decide how many candles we would like to blend, take the opening price of the first candle, the highest and lowest prices achieved across all candles and finally the closing price of the last candle. Using CandleScanner you are able to blend as many candles as you like.

Figure 1. Hammer/Hanging Man

Figure 1. Blended candles result in a combination known as Hammer/Hanging Man.

Figure 1 show the position for two candles. We have a down period with a relatively large body for the first candle, followed by a period with a larger body, which fully engulfs at the body of the previous period.

The two individual candles form what is known as a Bullish Engulfing pattern, the single resulting blended candle being a Hammer/Hanging Man. Because basically they look the same, we can only differentiate between them by context, i.e. Hammer can be formed in a downtrend and the Hanging Man in an uptrend. The interpretation placed on the Hammer is that it signals a potential bullishness in the market, that is, a potential bullish reversal after a prolonged downtrend.

To understand how to construct blended candlesticks we need first to understand the notion of base time interval used in CandleScanner.

The base time interval of the symbol is the minimal time interval which can be used for the given symbol which is imported into CandleScanner. For example, having imported the quotes of EUR/USD symbol expressed in 15-minute time intervals allows us to plot the chart as 15-minute chart, or any multiple of 15-minutes (e.g. 30-minutes, hourly, daily). With the base time interval equal to 15-minutes, you cannot, however, plot the chart made up of 20-minutes candlesticks.

Some software on the markets allows this, but it does not make sense and, as a result, incorrect data is presented. When we have, say, 15-minutes quotes, it means that we have the following information:

  • Open price when the 15-minutes period begins
  • Close price when the 15-minutes period ends
  • High and low price over the 15-minutes period

It is clear from this that we cannot plot 20-minute candles, as we do not have the full profile of market prices as at the end of the 20th minute. For this reason, CandleScanner does not allow you to plot charts in such cases.

As described above, a blended candle is a candle which combines a specified number of individual candles for some base time interval. For example, a daily candle (i.e. the one which base interval is one day) can be used to build a blended candle made up of 3 such daily candles. So, as a result of blending 300 daily candles, we end up with a set of 100 3-daily candles.

In CandleScanner, the user can create custom time intervals to plot on the chart. The following naming convention is used:

  • m is used for minutes; for example 1m = 1 minute, 2m = 2 minutes and so on
  • h is used for hours; for example 1h = 1 hour, 2h = 2 hours and so on
  • d is used for days; for example 1d = 1 day, 2d = 2 days and so on
  • w is used for weeks; for example 1w = 1 week, 2w = 2 weeks and so on
  • M is used for months; for example 1M = 1 month, 2M = 2 months and so on
  • Y is used for years; for example 1Y = 1 year, 2Y = 2 years and so on
  • c is used for base time interval candles; for example 1c = 1 candle, 2c = 2 candles and so on

In CandleScanner you can switch the time interval in two ways:

  • Using the time interval buttons
  • Using the combo-box with user defined intervals

Please note that time interval (e.g. daily, weekly, monthly) is not always (and most likely is not) the same as the n base time interval candles i.e. the combination of an identical number of candles.

It may so happen that, due to holiday, for example, there are less than 5 working days in a certain week. If we have daily candles (base time interval of the candle is one day) and display them on the chart in weekly time intervals, this combines the daily candles for the week in question, irrespective of how many actual daily candles there were that week (in this case, the weekly candle would be a blend consisting of 4 daily candles).

Had we used a time interval consisting of 4 candles for a given week, say because of a one day holiday that week, the resulting profile of weekly blended candles would consist of different numbers of daily candles. For this reason, CandleScanner employs the notion of n base time interval candles.

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