The Importance Of The Number Three In Candlestick Analysis

The emphasis on triple tops and bottoms by the Japanese probably has to do with the importance of the number three in the Japanese culture. We, as Westerners, would not necessarily see anything special about the three peaks. Our view would be that double tops and, more rarely, tops which have been tested four times can be just as significant as triple tops. But the Japanese think differently. And maybe they can show us a side of Western analysis which we may have overlooked. Intriguingly, there are many pattern and technical concepts based on the number three in Western technical analysis as well as in candlestick charting. The following is a quote from John Murphy's book Technical Analysis of the Futures Markets:

It's interesting to note how often the number three shows up in the study cf technical analysis and the important role it plays in so many technical approaches. For example, the fan principle uses three lines; major bull and bear markets have three phases (Dow theory and Elliott Wave Theory); there are three kinds of gaps some of the more commonly known reversal patterns, such as the triple top and the head and shoulders, have three prominent peaks; there are three different classifications of trend (major, secondary, and minor) and three trend directions (up, down, and sideways); among the generally accepted continuation patterns, there are three types of triangles — the symmetrical, ascending, and descending; there are three principle sources of information — price, volume and open interest. For whatever the reason, the number three plays a very prominent role throughout the entire field of technical analysis.'

John Murphy was, of course referring to Western technical analysis. But his phrase, "the number three plays a very prominent role" is especially true of Japanese candlestick analysis. In pre—modern Japan, the number three had an almost mystical associations. There is a saying "three times lucky" that expresses this belief. Parenthetically, while the number three is regarded as lucky, the number four is viewed as a foreboding figure. The reason for this belief is easy to ascertain—in Jap— anese the pronunciation for the number four and the word death are the same.

Some specifics of the frequency of three in candlestick charting are as follows: There are the three white soldiers that presage a rally; the omi nous three black crows that portend a price fall; top patterns include the three mountain top and its variation; the three Buddha pattern; the three river bottoms; the three windows (see Chapter 7) which define the extent of a move; the three methods (see Chapter 7); and the three candlestick patterns including the morning and evening stars. The Japanese also believe that if a window (during a rising market) is not closed within three days the market will rally.

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