Mastering Financial Pattern Recognition

Chapter 6. Classic Contrarian Patterns

By now you should be familiar with the concept of trend following, the technique of riding an existing trend in the expectation that it persists. It is time to see the contrarian patterns that signal a reversal or at least a correction in the initial move. Therefore, contrarian patterns suggest a strategy of fading the trend as opposed to riding it.

The chapter covers the classic contrarian patterns. Remember that by classic, I mean the patterns that are already known and established in the world of technical analysis. The purpose of this chapter is to create the contrarian patterns’ objective conditions and back-test them so that you can form an opinion about their frequency and predictability.

The Doji Pattern

Whenever someone mentions candlestick patterns, many think about the Doji pattern, as it is the most known and intuitive configuration. The word doji means “mistake” in Japanese, and this is logical as traders label it as an indecision pattern.

Like the Marubozu pattern, the Doji pattern is a one-candle configuration where the open price equals the close price. This is why Doji is an indecision pattern.

To distinguish a bullish Doji from a bearish one, you have to check the previous candlestick as well as the one after it. Figure 6-1 shows the theoretical bullish Doji configuration. In a falling market, the apparition of an indecision candle such as the Doji can be a first clue to a change of direction. It must be confirmed ...