Bollinger Bands and TRENDING market
If upper and Bollinger bands either converge ... or diverge ..., does that mean the market is TRENDING? No - Bollinger bands measure volatility, which is an measure of how much variation there is in the price of the instrument. It does not indicate a trend which means that the instrument tends to move in a consistent direction.  When Bollinger bands are close together, that means volatility is relatively low, and vice-versa. They can  be interpreted as signals that a stock might move in one direction or the other, but they are not a measure of directional movement. If upper and bollinger bands either converge (both bands are getting more and more close together) or diverge (both bands are getting more and more away from each other), does that mean the market is TRENDING? The answer is no. The divergence or convergence of BB-upper & lower band does not indicate if the market is trending or not. It only indicated if volatility is increasing or decreasing. Or is market trending only in case if both bands, upper and lower, are parallel and at the same time NOT horizontal? The answer is yes. To understand the reason consider that BB is constructed from a central Moving Average along with standard deviation. Upper Band=MA+2*SD, Lower Band=MA-2*SD. A moving average is a trend following indicator and volatility has nothing to do with trend (as SD only measures the price movement around the mean). Which essentially means BB has trend following qualities. The upper and lower bands remain more or less parallel in between band contraction and expansion. Refer below:   You shall see distinctly phases when BB bands are not parallel and are parallel and not horizontal. As mentioned above, when BB bands are expanding or contracting they do not give indication of the trend direction. When they are parallel, close or apart and not horizontal, they provide a good directional bias through the general slope. Though a more effective method to determine trend and its direction is the central MA of BB. Again, refer below:  Here you can see that some portion of the bands are parallel and more or less horizontal. The price action would tell you that the stock is now range-bound as opposed to trending. The primary use of the BB bands are to gauge volatility as @misantroop stated. The primary trend direction is usually derived from the central MA. Bollinger Bands are placed standard deviations away from the moving average. Therefore if the price is volatile, the bands diverge from the mean. During consolidation the bands would converge. They do not provide a clear indication of whether the price is trending or not.
"Let me start with a somewhat sarcastic statement: There are probably as many things done to analyze a stock as there are people doing the analysis! That said, at a general level an analyst researches the historical performance of the company at a fairly detailed level (operations within divisions of the company, product development cycles within divisions, expenses vs income trends for each division and product, marketing costs, customer acquisition costs, etc); gathers information about what the company is doing now AND planning to do in the future -- often by a discussion with principles at the company; establishes a view on related macro-economic trends, sector and industry trends, demographic trends, etc.; and combines it all to forecast a change in revenues, margins, free cash flow, dividends, etc. over a period of time.   They then apply statistics that relate those numbers to stock price in order to imply stock prices and price ranges over those same periods.  Finally, depending on how those stock prices compare to the current stock price, they'll classify the stock as Buy, Sell, Hold, etc. This sounds like alot of work.   And it generally is if you get detailed about it, which is what professionals or significant money managers are doing.   However, there are also lots of arm-chair analysts posting their output on any number of financial sites (Seeking Alpha, Motley Fool, etc.) if you'd like to really explore the range of detail some people consider as a ""stock analysis"".  That sounds more negative than I intended it to be, so let me clarify that I think some of these write-ups are really quite good IMO." Candle stick patterns are generally an indication of possible short term changes in price direction (if a reversal pattern). A doji is such a reversal candle, and should be read as there could be a short term change in the direction of price action. A doji is most effective at peaks or troughs, and the outcome can be a higher probability if occuring during overbought conditions (at the peak) or during oversold conditions (at the trough). So a doji should be used for short term changes in direction and not a total change in the overall trend. Although there could be a doji at the very top of an uptrend or at the very bottom of a downtrend, we wouldn't know it was the change of the trend until price action confirms it.  The definition of an uptrend is higher highs and higher lows. The definition of a downtrend is lower lows and lower highs. So an uptrend will not be broken until we have a lower high and confirmed by a lower low, or a lower low confirmed by a lower high. Similarly a downtrend will not be broken until we have a higher low confirmed by a higher high or a higher high followed by a higher low. Another thing to consider is that doji's and other candle stick patters work best when the market is trending, even if they are only short term trends. You should usually wait for confirmation of the change in direction by only taking a long trade if price moves above the high of the doji, or only taking a short trade if price moves below the low of the doji. Leather cuff watch band are available in a wide range of sizes and colours and they of course are one of the most incredibly desirable wrist accessory, wearing which on hand could make you feel the worth of carrying a spectacularly special addition. "Trends and trajectories mean nothing when the market is at an inflection point. You can't predict the future when you don't know what the players have planned.  EDIT: Make that ""can't know"", since even the big players don't know what they are doing next." "I interned for about six months at a firm that employed a few technical analysts, so I'll try to provide what little information I can. Since the bulk of the intra-day trading was decided algorithmically, technical analysts had two main functions: This basically boils down to my answer to your question. There are still enough people, trading firms, etc. who believe in candlestick charting and other visually subjective patterns that if you notice a trend, pattern, etc. before the majority of traders observing, you may be able to time the market successfully and profit. This is becoming increasingly dangerous, however, because of the steps I outlined above. Over time, the charting patterns that have been proven effective (often in many firms individually since the algorithms are all proprietary) are incorporated into computer algorithms, so the ""traders"" you're competing with to see the pattern are increasingly low-latency computer clusters less than a few blocks from the exchange. Summary: Candlestick charting, along with other forms of subjective technical analysis, has its believers, and assuming enough of these believers trade the standard strategies based on the standard patterns, one could conceivably time the market with enough skill to anticipate these traders acting on the pattern and therefore profit. However, the marginal benefits of doing so are decreasing rapidly as computers take over more trading responsibility.  Caveats:  I know you're in Australia, where the market penetration of HF/algo traders isn't as high as in the US, so it might be a few more years before the marginal benefits cease to be profitable; that being said, if various forms of technical analysis proved wildly profitable in Australia, above and beyond profits available in other markets, rest assured that large American or British trading firms would already have moved in.  My experience is limited to one trading firm, so I certainly can't speak for the industry as a whole. I know I didn't address candlestick charts specifically, but since they're only one piece of visual technical analysis, I tried to address the issue as a whole.  This somewhat ties into the debate between fundamental or technical analysis, which I won't get into. Investopedia has a short article on the subject. As I said, I won't get into this because while it's a nice debate for small traders, at large trading firms, they don't care; they want to make profit, and any strategy that can be vetted, whether it's fundamental, technical, or astrological, will be vetted.  I want to add more information to my answer to clear up some of the misconceptions in the comments, including those talking about biased studies and a lack of evidence for or against technical analysis (and candlestick charts; I'll explore this relationship further down).  It's important to keep in mind that charting methods, including candlestick charts, are visually subjective ways of representing data, and that any interpretations drawn from such charts should, ideally, represent objective technical indicators. A charting method is only as good as the indicators it's used to represent. Therefore, an analysis of the underlying indicators provides a suitable analysis for the visual medium in which they're presented.  One important study that evaluates several of these indicators is Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation by Lo, Mamaysky, and Wang. Lest anyone accuse its authors of bias, I should point out that not only is it published by the National Bureau of Economic Research (a highly reputable organization within economics and finance), but also that the majority of its authors come from MIT's Sloan school, which holds a reputation second to none. This study finds that several technical indicators, e.g. head-and-shoulder, double-bottom, and various rectangle techniques, do provide marginal value. They also find that although  human judgment is still superior to most computational algorithms in the area of visual pattern recognition, ... technical analysis can be improved by using automated algorithms Since this paper was published in 2000, computing power and statistical analysis have gained significant ground against human ability to identify and exploit for visual pattern detection like candlestick charts.  Second, I suggest you look into David Aaronson's book, Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals. He finds similar results to the Lo, et. al. paper, in that some technical indicators do add value to the investment process, but those that do are those that can be represented mathematically and thus programmed directly into trading algorithms (thus bypassing visual tools like candlestick charts).  He describes how studies, including Lo, et al., have found that head and shoulders patterns are worse than random, i.e. you would earn higher returns if you simply traded at random. That point is worth than repeating. If a day-trader is using a candlestick chart and using head-and-shoulders patterns as part of their toolkit, he's rolling the dice when he uses that pattern and returns that come from its application come from chance. This reminds me of that old story about a company that sends out pamphlets predicting the results of sports games, complete with ""strategies"" and ""data"" to back up the predictions. The company sends out several versions of the pamphlet every game, each predicting a different winner. Given a large enough sample size, by the end of the season, there are a few people who have received a pamphlet that accurately predicted the winner for every game and they're convinced the system is perfect. The others weren't so lucky, however. Relying on candlestick charts and TA patterns that are relics from the pre-computerized era is reassuring to some traders and gives them a sense of control and ""beating the market,"" but how long will chance remain on your side? This is why I maintain that visual tools like candlestick charts are a slowly dying medium. They certainly still add value to some trading firms, which is why Bloomberg terminals still ship with this functionality built in, but as more and more research shows, automated algorithms and statistical indicators can provide more value. It's also important to think about whether the majority of the value added by visual tools like candlestick charts comes in the form of profit or a sense of security to traders who learned the field using them over the past few decades.  Finally, it's extremely important to realize that the actions of retail investors in the equities market cannot begin to represent the behaviors of the market as a whole. In the equities markets alone, trading firms and institutional investors dwarf retail investors, and the difference in scale is even more vastly pronounced in derivatives and currency markets. The fact that some retail investors use candlestick charts and the technical indicators they (hope) underlie them provides nothing but minor anecdotal evidence as to their effectiveness." Regardless of your thoughts on what was happening in late 2012, financial prices should not be used as the sole barometer of a recovery...this is why the Fed uses tons of macroeconomic data, not just that BAC has been up 20% in the last 6 months.   My point is if you are going to tout what seems to be a market timing model, where the authors are proud of the fact that the entire thing is data mined,  you need strong out of sample evidence (over a few business cycles) that it works.  Nothing here comes close There are multiple factors at play that drive stock price movements, but one that can be visualized is that stocks can be priced relative to other (similar stocks).  When one stock price goes up without fundamental changes (i.e. daily market noise/movements), it becomes slightly more expensive relative to it's peers.  Opportunists will sell the now slightly more expensive stock, while others may buying the slightly cheaper (relatively) peer stock.    Imagine millions of transactions like this happening throughout each hour, downward selling pressure on a stock that rises too fast in value relative to it's peers or the market, and upward buying pressure on stocks that are relatively cheaper than it's peers.  It pushes two stocks towards an equilibrium that is directionally the same.    Another way to think of it is lets say tomorrow there is $10B in net new dollars moved into buy orders for stocks that comes from net selling of bonds (this is also partly why bonds/stocks are generally inversely related).  That money goes to buys stocks ABC, XYZ, EFG.  As the price of those goes up with more buying pressure, stocks JKL, MNO, PQR are relatively a tad cheaper, so some money starts to flow into there.  Repeat until you get a large majority of the stocks that buyers are willing to buy and you can see why stocks move in the same direction a lot of times. HFT doesn't increase correlations nor do hedge funds, If you look at the euro crisis, correlations have skyrocketed, then in late december jan and feb during the rally the correlations started subsiding and specific risk started taking over, crisis mode increases correlations.