How to Combine Candlestick Patterns (Blended Candles)

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In this blog post, we introduce the concept of blending candlesticks, a technique that will be explored in greater detail in subsequent articles. Blending candlesticks involves combining adjacent candles into a single candlestick, summarizing the outcome of several periods in one candle. This technique can be applied across different time scales, such as minute-by-minute, hour-by-hour, or day-by-day candles. The purpose of blending candles is to provide a clearer insight into market activity over longer periods.

Table of Contents

Why Blend Candlesticks?

Blending candlesticks offers several advantages for traders:

– Stronger Signals: Blended candles can create a single, more robust signal, helping traders identify key market movements.
– Minimizing Market Noise: By blending candles, traders can reduce the impact of market noise, leading to a more accurate reflection of underlying activity.
– Revealing Hidden Patterns: Blending certain candles can help reveal patterns that may not be visible when analyzing individual candles.
– Reducing Psychological Stress: Watching individual candles over short periods can create stress, leading to premature exits from trades. Blending candles helps traders stay focused on their trading plan and avoid reacting emotionally to short-term price movements.

How Blending Works

The process of blending candlesticks is straightforward. First, decide how many candles you want to blend. Then, take the opening price of the first candle, the highest and lowest prices achieved across all candles, and the closing price of the last candle. The result is a single candlestick that represents the combined activity of the selected periods.

Examples of Blending Candlesticks

Hammer/Hanging Man

In Figure 1, we see the blending of two candles. The first candle is a down period with a large body, followed by a second candle with a larger body that fully engulfs the previous period. This creates a pattern known as a Bullish Engulfing pattern, which, when blended, results in a Hammer or Hanging Man candlestick. The Hammer typically signals potential bullishness after a downtrend, while the Hanging Man forms in an uptrend.

Shooting Star

Figure 2 shows the blending of a Bearish Engulfing pattern, resulting in a Shooting Star candlestick. The Shooting Star is often formed after a prolonged advance and signals a potential bearish reversal. The long upper shadow indicates that the bulls initially dominated, but the bears regained control, closing the price below the opening.

Blending Multiple Candles

Figure 3 demonstrates the blending of three candles. By blending multiple candles, traders can summarize the market’s actions over several periods, leading to more insightful market signals.

Practical Application in CandleScanner

In CandleScanner, the base time interval is crucial for blending candles. The software allows you to blend candles of the same time interval (e.g., 15 minutes, 30 minutes, etc.), ensuring accurate data representation. By blending candles, traders can build basic candles, which can serve as building blocks for more complex patterns.

Spotting Hidden Patterns

Blending candles can help identify patterns that might otherwise be overlooked. For example, a Bearish Engulfing pattern that doesn’t initially meet the criteria might become valid after blending adjacent candles, revealing market activity that was previously hidden.

Concluding Thoughts

Blending candlesticks is a powerful technique that allows traders to gain a clearer understanding of market movements by summarizing multiple periods into a single candle. This approach helps minimize noise, reveal hidden patterns, and reduce the psychological stress associated with short-term trading. As traders become more familiar with blending candles, they can enhance their trading strategies and improve decision-making in the market.