Mastering Financial Pattern Recognition

Chapter 11. Candlestick-Based Contrarian Strategies

This chapter covers the contrarian part of candlestick pattern strategies. Remember that candlestick patterns on their own are unlikely to provide stable returns, as they must join forces with more sophisticated techniques and indicators in order to transform simple ideas and observations into actionable trade setups.

You should recognize some of the indicators used in this chapter as they have already shown that they can be useful in trend following. Notably, the RSI can provide not only the current market state (helpful in determining the trend) but also extreme levels that could point to a reversal (helpful in determining contrarian trades). In other words, depending on how you use it, the RSI can be a trend-following or a contrarian indicator.

Make sure to focus on the intuition of combining patterns with indicators so that you can create your own combination of strategies. After all, the point of Chapter 10 and Chapter 11 is to help you design your own strategy.

Combining the Doji Pattern with the RSI

This strategy may be the most familiar one that combines a candlestick pattern and a technical indicator. With the Doji being the simplest contrarian configuration and the RSI being the most commonly used and researched indicator, both can give a good confirmation for the expected contrarian move.

Note

The RSI filter makes it possible to transform the Doji into a one-candlestick pattern instead of three. This is because ...