It actually just hit me that just memorizing candlestick patterns or having a cheat sheet for candlestick patterns is just not going to cut it. If it were easy as following candlestick patterns, we'd all be living in a penthouse. Here's the reason why I believe this.
You cannot look at candlesticks individually. In probability theory, viewing each event individually is called being mutually-exclusive. Basically it means that the last event does not effect the probability of something in the next event. However, markets don't necessarily work like that.
Humans are not computers, we don't reset our emotions every trading day. Something that's been bothering you for a couple days can affect your trading a couple days later. This applies to group thinking as well. Negative emotions within buyers can spread to other buyers. For example, if enough buyers were feeling somewhat negative about a currency pair, they can sell their shares, causing prices to somewhat stumble. When prices stumble a bit, human fear starts to set in. This is where it gets interesting.
The slight drop in prices causes weaker buyers to exit the market, causing prices to keep going down.
And so even large entities such as all buyers and all sellers of a certain stock have emotions and these emotions do not reset each day. All buyers don't start off the day 50% bullish sentiment and 50% bearish sentiment. If the stock has been rallying for the last two trading days, they're more likely to start their day off with 60% bullish and 40% bearish.
So in this case, we cannot look at candlestick patterns as individual events, but rather an event that's connected to a larger story. This is where you have to take in context about what's going on. What did the trend look like prior to the candlestick? Was there a sharp reaction near any major supply and demand zones? So you have to start looking at previous candles and build the story of what's going on by just reading the history of the chart. Then once you have a larger story built, then you can start to analyze future candlesticks as they form and further build the story based on the story made by reading the history.
I wonder if someone could build a RNN (recurring neural network), maybe with LSTM (long-short-term-memory), to let AI build the prior story for us and then we just use the generated story to base our next decisions.
That is why I think just memorizing candlestick patterns is useless. You have to understand what's going on around it.
You cannot look at candlesticks individually. In probability theory, viewing each event individually is called being mutually-exclusive. Basically it means that the last event does not effect the probability of something in the next event. However, markets don't necessarily work like that.
Humans are not computers, we don't reset our emotions every trading day. Something that's been bothering you for a couple days can affect your trading a couple days later. This applies to group thinking as well. Negative emotions within buyers can spread to other buyers. For example, if enough buyers were feeling somewhat negative about a currency pair, they can sell their shares, causing prices to somewhat stumble. When prices stumble a bit, human fear starts to set in. This is where it gets interesting.
The slight drop in prices causes weaker buyers to exit the market, causing prices to keep going down.
And so even large entities such as all buyers and all sellers of a certain stock have emotions and these emotions do not reset each day. All buyers don't start off the day 50% bullish sentiment and 50% bearish sentiment. If the stock has been rallying for the last two trading days, they're more likely to start their day off with 60% bullish and 40% bearish.
So in this case, we cannot look at candlestick patterns as individual events, but rather an event that's connected to a larger story. This is where you have to take in context about what's going on. What did the trend look like prior to the candlestick? Was there a sharp reaction near any major supply and demand zones? So you have to start looking at previous candles and build the story of what's going on by just reading the history of the chart. Then once you have a larger story built, then you can start to analyze future candlesticks as they form and further build the story based on the story made by reading the history.
I wonder if someone could build a RNN (recurring neural network), maybe with LSTM (long-short-term-memory), to let AI build the prior story for us and then we just use the generated story to base our next decisions.
That is why I think just memorizing candlestick patterns is useless. You have to understand what's going on around it.