Encoding candle structure as a numeric filter

A weighted score for each bar

One CandleCode construction assigns separate integer weights to body color, body size, upper shadow, lower shadow, and gap, then adds those signed components into a single bar score.

The body-color weight is added for an up candle, subtracted for a down candle, and omitted when open and close are equal. The body-size component scales with how large the candle body is, from a large down body to a large up body. Each shadow component is the bullish increment from an upper shadow or the bearish decrement from a lower shadow, and both are zero when that shadow is absent. The gap component is the signed increment for the distance between the current open and the prior close.

Example weights

In the worked weighting example, body color and body size each use 32, each shadow uses 16, and the gap uses 8. A white body adds 32, a black body subtracts 32, and an unchanged body contributes nothing from color.

Under those same example weights the body-size component ranges from -32 to +32, each shadow component ranges from 0 to 16 in absolute value, and the gap component ranges from -8 to +8.

Threshold crossing after double smoothing

A turning-point rule can be built by double-smoothing CandleCode with successive averages of 21 and 3 bars. The double-smoothed CandleCode series can then be read more slowly than the raw score.

A long is taken when that series crosses above 50, and a short is taken when it crosses below 70. Those levels are replaceable examples of a threshold crossing.

Band crossing on the same series

A second rule keeps the same 21-then-3 double-smoothed CandleCode series but replaces the fixed levels with 20-period, 2-deviation Bollinger envelopes. It goes long on a cross above the lower band and short on a cross below the upper band.

That band crossing uses envelopes built from the encoded series itself rather than from a separate price line.

Ways to plot the encoded series

The encoded series can be plotted raw, single-smoothed, double-smoothed, or as a CandleCode oscillator equal to the difference between the single-smoothed and double-smoothed lines.

Readings from a small sample

On a small sample of three-minute bars, slope changes of the double-smoothed line in extreme territory and oscillator crosses of the zero line were described as the most useful leading readings.

A scan can treat a CandleCode oscillator move from below zero to at or above zero as a buy condition and the opposite cross as a sell condition.

Adaptive averages as a price overlay

The MESA adaptive moving average can be implemented as an external library routine and plotted with a slower following adaptive moving average as a two-line overlay on price.