Candlestick Patterns

The candlestick patterns screened in NMS were selected by Steve Nison. The patterns are divided below between bullish and bearish. Note that all but two of the 18 patterns are “reversal” type patterns, meaning that the prior trend is expected to reverse directions. The Rising and Falling Window patterns are “continuation” patterns, meaning that the prior trend is expected to continue in the same direction. The patterns are listed in order of significance (i.e., score).

Signal Scores

In addition to the candlestick pattern, seven other conditions must be met in order for a signal to be generated. Each of these conditions is assigned a score to normalize the results. These scores range from 0 to 100 for bullish signals and 0 to -100 for bearish signals. The sum of the seven scores is calculated, then divided by seven to arrive at the Composite Score (i.e., C Score).

The C Score (Composite Score) is a score ranging from 0 to 100 that is comprised of the average of seven other scores. It is provided to give traders a single value to focus on. Five of the seven scores are provided in the Signals lists.

The seven C Score components include:

1. Pattern Score. Patterns are scored according to their “robustness.” Rising/Falling Windows patterns receive 100 points; Above/Below Stomach, 90; etc. The more reliable the pattern, the higher the score assigned.

Bullish

Rising Window (Score =100)

Above the Stomach (Score =90)

Morning Star (Score =80)

Bullish Engulfing (Score =70)

Long Lower Shadow (Score =60)

Piercing Line (Score =50)

Hammer (Score =40)

Bullish Harami (Score =30)

Southern Doji (Score =20)

Bearish

Falling Window (Score =-100)

Below the Stomach (Score = -90)

Evening Star (Score = -80)

Bearish Engulfing (Score = -70)

Long Upper Shadow (Score = -60)

Dark Cloud Cover (Score = -50)

Shooting Star (Score = -40)

Bearish Harami (Score = -30)

Northern Doji (Score = -20)

2. Bars Since Pattern Score. A value of 100 is assigned if the pattern forms at the current bar; 90 if one bar has passed since the pattern; 80 if two bars have passed since the pattern, etc.

3. Reward/Risk Ratio. A Reward/Risk ratio value greater than 3.75 is assigned a score of 100; between 3.5 and 3.75, 90; between 3.25 and 3.50, 80; etc. (see the Reward/Risk score section for more information)

4. 4V Score. If the 4V Score crosses above 40 on the current bar, then a score of 100 is assigned. If one bar has passed since crossing 40, then a score of 90; if two bars, 80; etc.

Technical indicators can be placed in one of four categories, Velocity (i.e., momentum), Verticality (i.e., trend); Volatility, and Volume. Collectively, these indicators are known as the “4V indicators”. A well-balanced trading system should contain at least one indicator from each V category. The 4V indicators used for NMS include: Ultimate Oscillator (Velocity), Dual Moving Average Crossover (Verticality), Trading Band Envelopes, and Ease of Movement (Volume).

5. Bars Since V Score. A value of 100 is assigned if the V Score crosses 40 at the current bar; 90 if one bar has passed since the crossing; 80 if two bars have passed since the crossing, etc.

6. Trend Score. The higher the Trend Score the more likely the trend is to reverse directions. The exception to this is in the case of Rising/Falling Window patterns. A high Trend Score associated with these continuation patterns means the trend is more likely to continue in the same direction.

7. SR Score. This measures the strength of the underlying short-term Support or the overhead short-term Resistance (for shorts). The SR Score is assigned 100 if the current bar’s Low (High) is near strong short-term support (Resistance); 90 if the support (resistance) is a bit less strong; etc. Support and Resistance are measured by calculating the price proximity (using Standard Deviation) of the three most recent Pivot Lows (Pivot Highs).

Bullish Patterns

Rising Window