The Condensed Candles study designed by Dave Cline is an attempt to extract additional information from common candlesticks, introducing the concept of candle signature. The candle signature is a combination of three integer numbers (HO, HC, and OL) calculated for each candlestick on chart. The signature is characteristic of candle shape and thus can be used in detection of signature patterns: the frequency of a particular signature occurrence might give you an insight into subsequent price action.
Before the signature parts (HO, HC, and OL) are calculated, you need to decide how fine you prefer the signature patterns to be, which is determined by the "segments" input parameter. Using a small number for this parameter will limit the total number of possible signatures to a relatively small value. For example, setting the parameter to three will provide 64 possible signatures. Using a larger number, e.g., nine, will amplify the granularity of candle definition, yielding 1,000 possible signatures.
Once you have set the parameters, the HO, HC, and OL values are calculated using the following algorithm:
- Calculation of segment divisor. Segment divisor is equal to 100 divided by the segment count. The segment count is the number you specified for the "segments" input parameter.
- Calculation of average range. Average range is equal to a simple moving average of range (high minus low).
- Calculation of range multiplier. Range multiplier is equal to the ratio of candle range to average range.
These values are rounded down and the signature conforms to the following notion: HO:HC:OL. The study then uses the calculated signatures to indicate the following:
- Candles with three most frequently occurring signatures.
- Labels displaying the percentage of times that following candle(s) closed greater than the signature candle.
- Labels displaying the average return (in price units) of the difference between the following candle(s) and the signature candle.
Using both the statistical data and the visual aspect of the study helps you evaluate the probability of future returns.
||Defines the signature pattern granularity. Greater values of this parameter yield greater numbers of possible signatures.|
||Defines the lookup period for candles following the signature candle. For example, setting this value to 3 will have the label show the percentage of times that three following candles closed greater than the signature candle.|
||Setting this parameter to "no" will turn off the bubbles displaying candle signatures.|
||Setting this parameter to "no" will turn off the label displaying the percentage and the average return.|
||Marks candles with the most frequently occurring signature.|
||Marks candles with the second most frequently occurring signature.|
||Marks candles with the third most frequently occurring signature.|
1. "Candlesticks, Condensed" by Dave Cline. Technical Analysis of Stocks & Commodities, February 2015.
*For illustrative purposes only. Not a recommendation of a specific security or investment strategy.