Candlestick Channels [LuxAlgo]

Candlestick Channels return channels whose extremities converge towards the price when a corresponding candlestick pattern is detected. This allows for us to obtain more reactive extremities in the presence of a cluster of candlestick patterns.

The detected candlestick patterns are also highlighted with labels on your chart automatically.

Settings

• Trend Length: Period of the stochastic oscillator used to determine trend sentiment; this sentiment is used to detect certain candlestick patterns.
  
• Convergence: Convergence percentage of the channel extremities used during the occurrence of a candlestick pattern. A lower value will return extremities converging more slowly toward the price.
  
• Smooth: Determines the degree of smoothness of the channel extremities.
  

Patterns

This category determines which patterns are detected by the indicator. Patterns toggled off will not be detected and won't affect the channels.

Usage

Candlesticks patterns are commonly used by traders to detect potential reversals or continuation periods in the price. It can be of interest to use them as core elements in the calculation of more classical indicators, this can allow us to filter out potential false signals returned by candlestick patterns by shifting the source of interpretation towards the channel extremities instead.

In this indicator extremities converge towards the price when a corresponding pattern is detected. As such bullish patterns will make the upper extremity converge towards the price, facilitating a cross with price. Using a lower convergence percentage will require a greater number of patterns to make the extremity converge closer towards the price.

Users can use the channel like most indicators returning extremities, with an uptrend being detected when price cross over the upper extremity and a downtrend being detected when price cross under the lower extremity.

An approach solely making use of crosses between the price and the average line can be used but the user should expect further whipsaws signals.

Users can eventually use the candlestick patterns as entries and use the extremities for confirmation. For example, users can follow a candlestick pattern return an indication in accordance with the detected trend by the channels.

This approach would lead to the following of bullish patterns when they occur in an uptrend, that is when the price is above the average line (in orange). The same logic applies to bearish patterns.

The chart above highlights the candlesticks patterns in accordance with a detected trend.

Notes

- Bullish/Bearish engulfing patterns are turned off by default due their more frequent appearance.

- Candlestick patterns relying on gaps were not included, since they would be more uncommon in cryptocurrencies, thus leading to a disparity between the indicator performance on the cryptocurrency and stock market.

Release Notes:

Minor changes.