The Interpretation Framework — Location, Magnitude, Confluence, and Confirmation

This is where students often get stuck — they memorize patterns but can't tell which signals to trust. These terms describe how to evaluate a pattern's quality once you've identified it.

• Pattern reliability — The historical frequency with which a pattern produces the move it predicts. Not every engulfing pattern reverses the trend; reliability is a statistical property, not a guarantee. Higher-reliability patterns produce their predicted move more often, but no pattern works every time.
• Failure rate — The percentage of times a pattern's predicted move does not occur. Often more useful than reliability for risk management — knowing a pattern fails 40% of the time tells you to size positions accordingly.
• Pattern failure — A specific instance where a pattern formed correctly but the predicted move did not follow. A failed bullish reversal in a downtrend often accelerates the downtrend, because traders who entered on the signal are forced out.
• Confirmation candle — The candle immediately following a reversal signal that either supports or rejects it. A bullish reversal pattern is confirmed when the next candle closes above the pattern's high; rejected when it closes below the pattern's low.
• Volume confirmation — Higher-than-average trading volume on a pattern's signal candle. Patterns formed on strong volume are generally more reliable than identical patterns formed on weak volume, because volume indicates broad participation in the move.
• Confluence — The occurrence of a candlestick signal at the same price level as another technical factor — a support line, a resistance level, a moving average, a Fibonacci retracement, a prior pivot. Patterns at confluence points are more reliable than the same patterns appearing in isolation.
• Location — Where in the broader trend a pattern appears. A bullish reversal pattern after a sustained, exhausted downtrend carries more weight than the same pattern after a two-bar dip. Location is what separates a meaningful signal from random noise.
• Magnitude — The size of a pattern relative to recent candles. An engulfing pattern where the second candle is twice the size of recent candles is more significant than one barely larger than the first.
• Penetration depth — In patterns where one candle pierces into the prior candle's body (piercing pattern, dark cloud cover, morning star), the percentage of the prior body that the new candle penetrates. Deeper penetration (closer to fully engulfing) generally indicates stronger reversal signals.

Hammer at a prior support level — confluence of candlestick signal, horizontal support, and trend context