Using the identification philosophy developed in the previous chapter, one can now adapt a method of determining just how successful candle patterns are. | 7 Reliability of Pattern Recognition Using the identification philosophy developed in the previous chapter one can now adapt a method of determining just how successful candle patterns are. Measures of Success The following three assumptions were used in measuring the success and or failure of the many different candle patterns 1. The pattern must of course be identified based upon its open high low and close relationships. 2. For the pattern to be identified the trend must be determined. This is interchangeable with the previous assumption each must exist in the methodology. 3. Some basis of measurement must be established to determine the success or failure of the candle pattern. To make a creditable prediction you either know the current trend or you do not. Both assumptions and possibilities have been used here. 223 Chapter 7 The Trend is Known Candle patterns fall into two general categories those that indicate a reversal of the current trend and those that indicate trend continuation. Each day for each tradeable a prediction is made about whether the known trend will continue or reverse for each prediction interval. In other words if today s close is above the exponential average trend then we assume that we are in an uptrend. The success or failure is measured by the change in this trend over the prediction interval. The prediction interval is the number of days into the future the success or failure was based upon. Prediction intervals refer to the time periods between the actual candle pattern and some point in the future. When a candle pattern occurs it is offering a short-term forecast on the direction of the underlying market. The prediction interval is the number of days after the candle pattern that a determination is made as to whether or not the candle pattern was successful. A prediction interval is a time in the future that measures the candle pattern s forecasting ability. Once a trend starts the odds are that it will continue. Every student of .
