MetaTrader5
Master Candlestick Patterns with This MT5 Indicator
Candlestick patterns have a rich history, tracing back to Japanese rice traders in the 18th century. These patterns were crafted to capture the market's psychology through price movements—specifically, the open, high, low, and close prices. Patterns like the Three Black Crows, Bullish Engulfing, and Doji offer insights into shifts in supply and demand, signaling potential reversals or continuations based on trader sentiment.
In today's fast-paced markets, recognizing these patterns can still provide valuable insights, especially in less efficient environments with lower liquidity. Many traders, including those in automated systems, still lean on these patterns due to their roots in human behavior and manual trading decisions.
This project aims to detect well-known candlestick formations and visually distinguish them—bullish patterns are marked with a green line, while bearish patterns are highlighted in red. More than a decade ago, MetaQuotes released some code specifically for expert advisors, serving as a candlestick pattern library. However, the original library couldn't be utilized in indicators, leading to a complete rewrite of the code. This fresh approach allowed for testing and refining various pattern detection functions to ensure high-quality results.
Institutions like hedge funds and market makers are leveraging advanced strategies that incorporate machine learning and quantitative models. They analyze extensive datasets that go beyond basic price patterns and often position against retail traders' reactions to candlestick signals, particularly in liquid markets like forex and major indices.
Are the Patterns Still Relevant?
Absolutely! Candlestick patterns retain their relevance as they continue to reflect both human and algorithmic psychology. Retail and institutional traders keep an eye on key formations—like the Hammer at support levels—because self-fulfilling prophecies can emerge when numerous traders act on the same signals.
Context is Key: Patterns should never be considered in isolation. Their effectiveness often increases when they are combined with other elements such as support and resistance levels, trading volume, or trend indicators.
A study conducted in 2019 on candlestick patterns in forex indicated that formations like Doji and Engulfing carry statistical significance in predicting short-term reversals. However, their edge can diminish in high-frequency settings due to market noise and institutional counter-strategies.
In trending markets, continuation patterns—like the Three White Soldiers—tend to hold up well, but in choppy markets, reversal patterns may not have the same reliability.
Even large players don't always outmaneuver candlestick patterns. Many institutions incorporate these patterns into their broader strategies, especially when they coincide with key levels like Fibonacci retracements or pivot points.
Within the indicator, an average is calculated to determine the typical body size across a series of candles. The option labeled "use state machine" alters the indicator's behavior: when a bullish pattern is identified, it will ignore subsequent bullish patterns until a bearish one appears, and vice versa.
Additionally, two modes are available in the indicator: "Immediate Formation," which detects patterns without delay (though it may repaint), and "Formation Confirmed," which confirms patterns in the previous bar, eliminating any repainting risks.
2025.08.23
