The principal data used in short-term patterns—both traditional and candlestick, regardless of bar time—is open, close, high, and low. The opening price is traditionally considered the price established from any news, emotion, anticipation, or mechanical signals that have built up overnight. Most professional day traders, scalpers, and even swing traders prefer to avoid it. They wait for some action—a gap or opening range—to take place before judging the tone of the market.
Because the closing price is the final price of the day and the one at which most margin accounts are valued, it is like a summary of the bar’s activity. If the close is up, the majority and most recent action was positive; if the close is down, the majority and most recent price action was to the downside. Professionals use it as a benchmark with which to compare the next day’s price action. Most people reading the financial news remember and use it to value their accounts. The closing price becomes a benchmark for future action, both long and short term. Some traders consider it the most important price of the day, even though it is somewhat arbitrary.
The high is the upper extreme reached by buyers during the bar and is, thus, a measure of buying ability and enthusiasm. On the other hand, the low is the lower extreme reached by sellers during the bar and is, thus, a measure of selling ability and fear.
The configuration, length of the bar, position on the bar, preceding bar data, and price distance between each determine the pattern. As you might guess, there is a multitude of potential combinations, and all have been investigated for ways to profit. We present next just a few of the large array of short-term patterns that have shown promise in the past.
Source: Kirkpatrick II Charles D., Dahlquist Julie R. (2015), Technical Analysis: The Complete Resource for Financial Market Technicians, FT Press; 3rd edition.
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