Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30 years of stock market experience and widely regarded as a leading expert on chart patterns. His four books, including the best selling Encyclopedia of Chart Patterns, have been translated into seven languages. He may be reached at

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Bulkowski’s Black Candle

Market

Industrials (^DJI):

Transports (^DJT):

Utilities (^DJU):

Nasdaq (^IXIC):

S&P 500 (^GSPC):

As of 02/03/2012

12,862 156.82 1.2%

5,369 63.27 1.2%

451 1.52 0.3%

2,906 45.98 1.6%

1,345 19.36 1.5%

YTD

5.3%

7.0%

-2.9%

11.5%

6.9%

Tom's Targets Overview: 02/03/2012

13,100 or 12,400 by 02/15/2012

5,500 or 5,150 by 02/15/2012

470 or 440 by 02/15/2012

3,100 or 2,800 by 02/15/2012

1,375 or 1,300 by 02/15/2012

Test Portfolios and CPI

Indus. strength: 4.3%

Mutt Losers: None YTD

Mutt Winners: 2.4%

Wilder RSI: None YTD

CPI:

on 12/20/2011

In my book, Encyclopedia of Candlestick Charts, pictured on the right, I explore the entire range of candlestick patterns from abandoned babies to windows (not exactly A to Z, but you get the idea), in both bull and bear markets, using almost 5 million candle lines in the tests.

The book takes an in-depth look at 103 candlestick patterns and reports on behavior and rank (3 types: reversal rate, frequency, and overall performance), identification guidelines, performance statistics (tables of general statistics, height, and volume), trading tactics (tables of statistics on reversal rates and performance indicators), and wraps each chapter with a sample trade. I share a sliver of that information below. If you like what you read here, then you will love the book. Help support this website and buy a copy by clicking on the above link.

The black candlestick shows near random direction under actual market conditions since it acts as a continuation 52% of the time. In theory, it can act as either a continuation candlestick or a reversal. The only thing remarkable about this candlestick is its frequency: 3rd out of 103 where 1 is the most common. Performance over 10 days is about what you would expect: close to last place (ranking 82).

Important Results

Discussion

Identification Guidelines

Three Trading Tidbits

Example

Important Results for Black Candles

Theoretical performance: Reversal or continuation

Tested performance: Continuation 52% of the time

Frequency rank: 3

Overall performance rank: 82

Best percentage meeting price target: 84% (bear market, down breakout)

Best average move in 10 days: -6% (bear market, down breakout)

Best 10-day performance rank: 19 (bear market, down breakout)

All ranks are out of 103 candlestick patterns with the top performer ranking 1. "Best" means the highest rated of the four combinations of bull/bear market, up/down breakouts.

The above numbers are based on hundreds of perfect trades. See the glossary for definitions.

Black Candlestick

Black Candle Discussion

In theory, a black candlestick can act as either a reversal or continuation of the existing price trend. In testing, I found that it acts as a continuation 52% of the time, which is almost like saying the breakout direction is random. On a scale of 1 to 103, the black candle placed third for frequency, where 1 is best. That means the candle is as plentiful as beach sand in your shoes after a picnic on the lakeshore. The rank for overall price performance over 10 days is a dismal 82, well behind the herd.

In a bear market after a downward breakout is where the black candlestick gets its strength. It meets the predicted price target 84% of the time, drops 6% in 10 days, on average, and ranks 19th for that performance under those conditions.

Black Candle Identification Guidelines

Characteristic	Discussion
Number of candle lines	One.
Price trend leading to the pattern	None required.
Configuration	Look for a black colored candle of average size with shadows that are smaller than the body height.

Three Trading Tidbits for Black Candles

If you want a few bones from my Encyclopedia of candlestick charts book, here are three to chew on. The pages refer to the book where the tips appear.

Black candles that appear within a third of the yearly low perform best -- page 149.
Black candles taller than the median show price that moves almost twice as far after the breakout as those shorter than the median -- page 149-150.
If the day price closes above or below the top/bottom of the candle is on high volume, expect a larger price move than on those days that have light breakout volume -- page 150.

Black Candle Example

The black candlestick on the daily scale

The figure shows three black candlesticks on the daily scale. Each one has shadows smaller than the body height (although candle A might not look like it). Since this candle has no real defined breakout direction, I consider it meaningless. It is just another price bar on the chart.

Candle A begins the downtrend after a black candle with a tall upper shadow. Candle B looks as if it reverses the downtrend -- at least for a while. Candle C ends the swift down draft and price moves horizontally for a few days before rebounding. Can you tell anything from these three black candles?

-- Thomas Bulkowski