Rethinking Candlesticks - Volume And Standardization

Volume is a critical yet often overlooked component that corroborates the strength or weakness of price movements. By adjusting candlestick formations to account for volume, we develop a volume-weighted candlestick that offers a more accurate representation of market dynamics. This approach does not merely track when and where prices move but emphasizes the points at which significant trading activity occurs. Such integration allows traders to distinguish between price changes driven by substantial trading activity and those resulting from lighter trading volumes, which might not sustain.

For instance, a traditional candlestick might show a significant price jump, but without considering trading volume, this could be misleading. A volume-adjusted candlestick, however, could reveal that this jump was on low volume, suggesting less market conviction behind the move, a valuable insight for decision-making.

Standardization via Z-Scores
Standardizing candlestick data using z-scores is another leap towards more actionable insights. This normalization technique measures the number of standard deviations a data point is from the mean. Applying it to candlesticks allows traders to assess price movements relative to historical performance, smoothing out discrepancies caused by volatile or abnormal trading periods.

Standardization helps in comparing different periods or assets on a like-for-like basis, irrespective of underlying volatility or market conditions. For algorithmic traders, this means historical patterns can be recognized and exploited more systematically and reliably.

Practical Application and Benefits
Implementing this refined approach involves calculating volume-weighted prices within each candlestick's range and standardizing these figures across a defined look-back period to generate z-scores for opens, highs, lows, and closes. This method enriches the data feed into technical indicators and trading algorithms, enhancing the reliability of the signals they generate.