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Candlestick Pattern Recognition

Source: vignettes/candlestick.Rmd
candlestick.Rmd

{talib} includes 61 candlestick pattern recognition functions ported from TA-Lib. This vignette covers how they work, what they return, and how to tune their sensitivity.

A primer on candlesticks

A candlestick shows four prices for a chosen time period: Open, High, Low, and Close (OHLC).

The real body is the segment between the Open and the Close. If the Close is above the Open the candle is bullish; otherwise it is bearish.

The upper shadow extends from the top of the real body to the High; the lower shadow extends from the bottom of the real body to the Low. Together the shadows show how far price moved beyond the Open-Close range.

Candlestick patterns are defined by comparing the size and position of bodies and shadows—within a single candle or across a sequence of consecutive candles.

Available patterns

The 61 pattern functions can be loosely grouped by how many candles they inspect:

Candles Examples
Single-candle doji(), hammer(), shooting_star(), marubozu(), spinning_top(), long_line(), short_line()
Two-candle engulfing(), harami(), harami_cross(), piercing(), dark_cloud_cover(), kicking()
Three-candle morning_star(), evening_star(), three_inside(), three_outside(), three_white_soldiers(), three_black_crows()
Four+ candle concealing_baby_swallow(), rising_falling_three_methods(), mat_hold(), break_away()

Every function has a descriptive snake_case name and an uppercase alias matching the TA-Lib convention (doji / CDLDOJI, engulfing / CDLENGULFING, etc.).

Return values

All pattern functions require OHLC columns (~open + high + low + close) and return an integer matrix of the same length as the input:

  • 1 — bullish pattern (or direction-neutral pattern) identified
  • -1 — bearish pattern identified
  • 0 — no pattern
x <- talib::doji(talib::BTC)
table(x)
#> CDLDOJI
#>   0   1 
#> 300  56

Some patterns are inherently directional (e.g., engulfing() returns both 1 and -1), while others are direction-neutral (e.g., doji() always returns 1 for identified patterns).

Output encoding

By default, patterns are normalized to 1/-1/0. The original TA-Lib encoding (100/-100/0) can be restored with:

options(talib.normalize = FALSE)
table(talib::engulfing(talib::BTC))
#> CDLENGULFING
#> -100  -80    0   80  100 
#>   19   11  297   12   25

The eps parameter

Seven patterns accept an eps (penetration) parameter that controls how far one candle must intrude into the body of another. These are morning_star(), evening_star(), morning_doji_star(), evening_doji_star(), abandoned_baby(), dark_cloud_cover(), and mat_hold(). The default is eps = 0 for all of them.

## Evening Star with 30% penetration
x <- talib::evening_star(talib::BTC, eps = 0.3)
sum(abs(x), na.rm = TRUE)
#> [1] 0

Lookback and NA values

Every pattern has a lookback period: the number of initial rows that are returned as NA because the algorithm needs historical context before it can evaluate. The lookback depends on two things: the number of candles in the pattern itself, and the N parameter that controls how many prior candles are used to compute reference values for body/shadow classification.

x <- talib::doji(talib::BTC)
attr(x, "lookback")
#> [1] 10

Tuning candlestick settings

Pattern recognition in {talib} relies on classifying each candle’s body and shadows as “long”, “short”, “doji-like”, etc. These classifications are controlled by two parameters per setting:

  • N (lookback): How many prior candles to average when computing the reference value.
  • alpha (sensitivity): A multiplier applied to the reference value. The current candle is tested against alpha * reference.

All settings are modified via options() and take effect on the next pattern function call.

Available settings

The complete list of settings, their defaults, and what they control:

Body settings:

Setting Option prefix N alpha Rule
BodyLong talib.BodyLong 10 1.0 Body is long when longer than the average of the N previous bodies
BodyVeryLong talib.BodyVeryLong 10 3.0 Body is very long when longer than 3x the average
BodyShort talib.BodyShort 10 1.0 Body is short when shorter than the average
BodyDoji talib.BodyDoji 10 0.1 Body is doji-like when shorter than 10% of the average high-low range

Shadow settings:

Setting Option prefix N alpha Rule
ShadowLong talib.ShadowLong 0 1.0 Shadow is long when longer than the real body
ShadowVeryLong talib.ShadowVeryLong 0 2.0 Shadow is very long when longer than 2x the real body
ShadowShort talib.ShadowShort 10 1.0 Shadow is short when shorter than half the average shadow sum
ShadowVeryShort talib.ShadowVeryShort 10 0.1 Shadow is very short when shorter than 10% of the average high-low range

Distance settings:

Setting Option prefix N alpha Rule
Near talib.Near 5 0.2 Distance is “near” when <= 20% of the average high-low range
Far talib.Far 5 0.6 Distance is “far” when >= 60% of the average high-low range
Equal talib.Equal 5 0.05 Distance is “equal” when <= 5% of the average high-low range

Effect of lookback (N)

Changing N alters how many prior candles form the reference average. A shorter lookback makes the reference more reactive to recent price action:

## default N = 10
sum(abs(talib::doji(talib::BTC)), na.rm = TRUE)
#> [1] 56
## shorter lookback
options(talib.BodyDoji.N = 3)
sum(abs(talib::doji(talib::BTC)), na.rm = TRUE)
#> [1] 61

Effect of sensitivity (alpha)

Changing alpha makes the classification more or less permissive. A higher alpha means a wider acceptance threshold:

## default alpha = 0.1
sum(abs(talib::doji(talib::BTC)), na.rm = TRUE)
#> [1] 56
## more permissive: accept bodies up to 20% of the high-low range
options(talib.BodyDoji.alpha = 0.2)
sum(abs(talib::doji(talib::BTC)), na.rm = TRUE)
#> [1] 109

The default alpha = 0.1 for BodyDoji means: “the real body is doji-like when it’s shorter than 10% of the average high-low range over the past 10 candles.” Doubling it to 0.2 loosens the criterion and identifies more patterns.

Which settings affect which patterns?

Different patterns depend on different settings. As a general rule:

Charting patterns

Candlestick patterns integrate with the {talib} charting system. Bullish patterns are marked below the candle, bearish patterns above, and direction-neutral patterns use a neutral style:

{
    talib::chart(talib::BTC)
    talib::indicator(talib::doji)
    talib::indicator(talib::engulfing)
}

Multiple patterns can be layered on the same chart. Each call to indicator() adds its markers to the existing price chart.

Contributing and bug reports

The underlying library, TA-Lib, is a long-standing and well-known library but this R wrapper is still in its early stage. All contributions, suggestions, and bug reports are welcome.