Filtering candlestick signals with stochastic percent-D

How a candlestick line is drawn

A candlestick line is a single session plotted from open, high, low, and close. The real body is the thick open-to-close span: unfilled when the close is above the open, and filled when the close is below the open. Thin shadows mark the session high and low beyond that real body.

Name the pattern after the short-term trend

Candle patterns are combinations of one to five candlestick lines, most often two or three. They are grouped as reversal candle patterns of the current short-term trend, continuation candle patterns that support a defined trend, or indefinite candle patterns that may still be read as reversals if other confirmation appears.

Most candle patterns cannot be named until the immediately preceding short-term trend is identified. The method is framed as a short-horizon tool covering one to nine days.

Score the pattern against continuation bias

A recognized short-term trend is treated as more likely to persist than reverse. A reversal candle pattern is judged against that continuation bias. A continuation candle pattern must beat the baseline of simply knowing the trend.

If the trend is unknown, continuation versus reversal sits near 50 percent aside from any directional bias in the sample. That coin-toss baseline is not the relevant test once trend identification is required.

Pair candles instead of following them alone

Candle patterns can mark turns that do not later occur. Isolated pattern following is compared to systems that advertise many turns without counting false ones. Pairing candles with other analysis is offered as the filter.

Apply the percent-D threshold filter

The stochastic percent-D used in the examples is the three-period average of stochastic percent-K, calculated over 14 periods with thresholds at 20 and 80. Under that threshold filter, bullish candle setups were treated as favorable when percent-D was below 20, and bearish setups when percent-D was above 80.

Keep continuation patterns in the pairing

Continuation candle patterns were kept in the oscillator pairing because oscillators often weaken in trends. A continuation reading can let percent-D regain its usual rhythm while also confirming the trend.

What the worked charts pair

Worked charts pair a harami and percent-D below 20 with a later advance, then a later harami and percent-D above 80 with the end of that advance. Meeting lines, a gap opening that closes unchanged and is read as unclear direction or a possible end of the prior move, are paired with a high percent-D and a stalling rally. A doji star is paired with an early warning that an uptrend was ending.

Add divergence to a reversal package

A harami is a two-day pattern whose second real body stays inside a larger first-day real body. Combined with percent-D below 20 and a price-indicator divergence between percent-D and price, it was presented as a reversal package.

Related forms include the harami cross, a harami whose second session opens and closes at the same price, and a gapped doji star. A doji star is a doji that gaps from a long candle and is treated as a reversal only with confirmation in the next session.