As of 12/20/2024   Indus: 42,840 +498.02 +1.2%     Trans: 15,892 +32.54 +0.2%     Utils: 986 +14.76 +1.5%     Nasdaq: 19,573 +199.83 +1.0%     S&P 500: 5,931 +63.77 +1.1%	YTD  +13.7%   0.0%    +11.9%    +30.4%    +24.3%	Targets    Overview: 12/12/2024     44,200 or 41,750 by 01/01/2025   16,100 or 17,700 by 01/01/2025   1,050 or 975 by 01/01/2025   20,500 or 19,300 by 01/01/2025   6,100 or 5,775 by 01/01/2025
Chart Pattern Indicator: on 12/5/24

As of 12/20/2024   Indus: 42,840 +498.02 +1.2%     Trans: 15,892 +32.54 +0.2%     Utils: 986 +14.76 +1.5%     Nasdaq: 19,573 +199.83 +1.0%     S&P 500: 5,931 +63.77 +1.1%	YTD  +13.7%   0.0%    +11.9%    +30.4%    +24.3%
Targets    Overview: 12/12/2024     44,200 or 41,750 by 01/01/2025   16,100 or 17,700 by 01/01/2025   1,050 or 975 by 01/01/2025   20,500 or 19,300 by 01/01/2025   6,100 or 5,775 by 01/01/2025
Chart Pattern Indicator: on 12/5/24

Bulkowski on 2-Dance Candlestick

Initial release: 12/16/24.

Kevin McDonald brought the 2-Dance candlestick pattern to my attention in late 2024. Others may have found the same pattern earlier and call it something different, but I offered to test it for him. This article discusses my findings.

Summary Introduction Target Exit Testing Target Exit, Stock Performance Target Exit, ETF Performance Target Exit, Cryptocurrency Performance Additional Testing Shadow Direction Body Color Body Overlap Height Overlap Candle 1 Height Candle 2 Height Median Height Busted 2-Dance See Also

2-Dance

2-Dance: Summary

Does the 2-dance pattern outperform? That depends. I hate when people qualify their language like that. If you look at other small price patterns, it's a lower mid-list performer in stocks, near the top of the list when trading ETFs, and in second place for cryptocurrency trades (as I write this. I've other patterns to test).

If you trade the dance pattern, you'll want to do so only when it acts as a reversal of the short-term downtrend. Avoid shorting a stock based on the 2-dance pattern (meaning price tends to rise).

Because shorting a dance pattern results in losses, you might think of trading a busted downward breakout (price breaks out downward from the dance pattern and quickly reverses to soar. You buy long during the upward move). I tested the combination in stocks, ETFs, and cryptocurrency. None of the trades beat the non-busted benchmark, and all of the cryptocurrency trading results (average profit per trade) were losses. That was a surprise.

Here are the more important findings.

• Choose 2-dance patterns that have a tall downward shadow on the first price bar, and a tall upward shadow for the second price bar.
• Doji, as one of the price bars in the 2-dance pattern, shows superior performance, especially if the doji is the second candle.
• Reversals of the downtrend outperform continuations of the uptrend.
• A 2-dance pattern that is an inside day shows the best performance.
• Some body overlap helps performance except after an upward breakout in an uptrend (where no overlap is best).
• As the height of the second price bar in the pattern increases, profit drops.
• A tall first bar and short second bar in the dance pattern outperforms.
• Don't trade a busted dance pattern (that is, avoid downward breakouts that reverse direction and rise above the top of the dance pair).

2-Dance: Introduction

In this article, I reference parts of a candlestick pattern. The associated figure shows the various pieces.

A single candlestick is called a line. The day's high price is charted at the top, the low at the bottom, and the position of the opening and closing prices determines the candle's body color. The body of the candle can be a thin line (when all four prices are the same) or a rectangle. Often, though, you'll see a colored body, either white or black (or whatever colors you choose).

White bodies means price has closed above the day's open (on the daily scale). Black bodies means price has closed the day below the open. The color change has nothing to do with the prior day's close (in most implementations, that is).

When Mr. McDonald contacted me about the 2-dance pattern, he had lots of ideas about how it worked, but no proof. Let's look at an example of what he saw in many stocks.

The red square outlines a 2-dance pattern in 3D systems (DDD) in November 2021. The first candle has a tall lower shadow and small upward one. The second candlestick in the pattern has the reverse, a tall upper shadow and small lower one.

The bodies of the candle pair overlap somewhat. In this example the first body is black, meaning price opened higher than it closed. The second candle looks like a northern doji or perhaps an imperfect rickshaw man

Before testing, Mr. McDonald wasn't sure if candle color, shadow length, body color, and other variables were important to performance. He suspected the 2-line candle acted like a spinning top, a candle pattern that just takes up space on the chart and has little to no predictive value.

2-Dance: Target Exit Testing

The following "target exit" tests determine how well the pattern behaves in stocks, ETFs (exchange traded funds), and cryptocurrency. I want to compare this pattern with other small patterns, so I use the same testing method for each pattern.

See the associated image. Restrictions are few on the two price bars. Each price bar in the pattern must have a shadow that is at least three times the height of the body. If the body is x, then the longer of the two shadows should be 3x or more (at least three times the body height).

If the shorter shadow is y, then the longer shadow must be at least twice the height of the shorter one (2y). The longest shadows can be on the same side of the two candle lines. The body color wasn't used for identification of the dance pair. I excluded a four-price doji (a price bar with the open, close, high, and low prices sharing the same value).

2-Dance: Target Exit, Stock Performance

Shown in the chart is an example of the 2-dance pattern in a stock, highlighted by the red square.

In this example, the 2-dance pattern appears in a strong downtrend.

Entry triggered when the stock climbed above the top of the dance pattern (top green line, a buy stop placed a penny above the top of the higher candle line).

A day later, the trade was stopped out for a loss (a stop-loss order set a penny below the lower of the two shadows in the pattern triggered). Oops.

I tested the 2-dance pattern as I have other small patterns. I placed a buy-stop a penny above the top of the tallest price bar in the dance pattern, a stop-loss order a penny below the lowest price bar in the pattern, and a target exit at twice the height of the pattern added to the top of it.

If things work as expected, winning trades should make twice as much as losing trades.

The following table shows what I found.

I tested the dance patterns in a short-term up and down trend, compared to a benchmark under the same conditions (same stocks, same market, and so on).

The 2-dance pattern beats the benchmark for both trend directions, not by a lot, but some. The dance pattern works best when it acts as an upward reversal of the downtrend (with profit of $83.54 versus $68.70). By that, I mean price enters the 2-dance pattern from the top and also exits out the top (The inbound downtrend reverses and leaves the pattern rising).

2-Dance: Target Exit, ETF Performance

This is an example of the 2-dance pattern in an exchange traded fund.

The red box highlights the dance pattern.

Entry occurs two days after the dance ends, with a stop-loss order placed a penny below the bottom of the dance.

The target exit is twice the height of the dance pattern added to the top of it.

In this example, the order to sell triggers for a profitable trade (price reaches the target exit).

This is the same test as the prior one except I used 94 exchange traded funds (ETFs) instead of common stocks.

The dance pattern beats the benchmark but just by a little in uptrends ($49.24 versus $48.84). It performs much better as a reversal of the downward price trend with gains averaging $76.71 versus a benchmark of $51.31. The 49% win/loss ratio is one of the highest I've seen for small patterns.

2-Dance: Target Exit, Crypto Performance

The chart on the right shows how I tested performance in cryptocurrencies.

Here's a 2-dance in the cryptocurrency, AAVE (against the US Dollar). The red square highlights the dance pattern.

Entry occurs when the currency rises above the top of the dance pattern (an upward breakout).

A stop-loss order placed a penny below the bottom of the dance helps protect against adverse moves.

The target exit is twice the height of the dance added to the top of it. It triggered for a profitable sale.

This is the same test as the prior one except I used 38 crypto currencies instead of common stocks.

The dance pattern falls well short of the benchmark performance in uptrends but my guess is that's because of the low 144 trades (versus 2,491 for the benchmark). The dance pattern in a downtrend works much better, with the average trade making $224.85 versus $147.18 for the benchmark. My guess is that the 158 trades are not enough samples to compete against the 2,650 the benchmark uses. I'd be cautious trading the dance in cryptocurrencies.

2-Dance: Additional Testing

I programmed my computer to find two adjacent price bars on the daily scale in stocks from January 1990 to December 2024. Because there were a lot of them, I catalogued every-other-one.

I obeyed these selection rules for the tests that follow, but also for the target exit tests already discussed.

• A minimum price of $5 at the time the 2-dance appeared. I don't want to trade penny stocks (which is defined as stocks trading below $5).
• From 1990 to 2024, separated into bull and bear markets.
• The upper/lower shadow must be at least three times the body height.
• The longer of the two shadows must be twice as long (or more) as the short shadow.
• I computed the 5-day (before the start of the 2-dance) slope of a line of prices found using linear regression. This was not an identification guideline, but a metric to see if the short-term trend influenced performance. Linear regression is a way to plot a line such that the distance from the line to each price is minimal (the square of the distance is a minimum). The slope of that line determines the price trend. Tell your neighbors!

I did not restrict the selection by body color or opposing tall shadows (one up and one down). I let the data determine the best combination for performance. Let's discuss the findings.

For performance testing, I used these trading rules.

• An upward breakout happened when price climbed at least a penny above the top of the dance pattern. A downward breakout happened when the stock dropped below the bottom of the pattern by at least a penny.
• On the daily scale, if the 2-dance pattern showed price simultaneously rising above and dropping below the pattern (an outside day), then I ignored the trade.
• For upward breakouts, I place a buy stop a penny above the taller of the two price bars, and a stop-loss order a penny below the lower of the two price bars.
• I sold if price reached twice the height of the 2-dance pattern above the top of it. For example, if the higher of the two dance bars is at $10 and the lower of the two candles is at $9, the height of the 2-bar pattern is $1. The target is twice this amount ($2) added to the higher of the two dance bars, giving a target of $12 (or $10 + $2).
• For downward breakouts, I did the reverse. I placed a stop-loss order a penny above the higher of the two dance bars, a short sale triggered when price dropped below the lower of the two candles minus a penny, with a 2x height target exit below the bottom of the 2-dance pattern.

The chart shows an example. Price breaks out upward from the 2-dance pattern (which I highlight in the red box) when it climbs above the top of the pattern. The uptrend stops before the stock reaches the target. Instead, the stock falls and triggers the stop-loss order placed a penny below the lower of the two dance price bars.

Benchmark. I randomly grabbed any two adjacent price bars, selected so their numbers didn't fill my spreadsheet (meaning I skipped every x patterns before cataloging one). I used the same entry, height exit, stop-loss provisions, and the same stocks from 1990 to 2024 to determine the average performance.

2-Dance: Shadow Direction

Does the direction (up or down) of the long shadow influence performance of the 2-dance?

The following table sorts the data by whether the long shadow points up or down.

Notice that in seven of eight cells, the profit from downward breakouts is actually a loss. The remaining profitable one ($9.15 for both long shadows facing downward) is well below the profit from all of the other cells. This finding tells me that you shouldn't short a stock showing a 2-dance pattern.

The rest of this article will not discuss findings related to downward breakouts because of inferior performance (verified by other metrics, too).

Findings

• For dance patterns with the best performance, choose those that have a tall downward shadow on the first price bar, and a tall upward shadow for the second price bar.

2-Dance: Body Color

Does the body color of the two candle lines in the 2-dance pattern matter to performance?

In a doji candlestick pattern (a one-line candlestick), the opening and closing prices are the same (or nearly so), so the body does not have a color. Reference the chart in the Introduction for a refresher.

In the adjacent picture, price bar A shows a white candle when price closes higher than it opened.

Candle B is black. Price closes below where it opened.

Candle C is a doji, where the opening and closing prices are the same.

The following table shows the results of testing the performance of the 2-dance pattern in bull markets with upward breakouts (remember, downward breakouts sucked), sorted by the inbound price trend (up or down).

Let's take a look at the results.

The top half of the table shows the performance in a short-term uptrend. The first two rows show vastly superior performance ($110.18 and $101.48) if the second candle is a doji. Indeed, if either or both of the lines in the 2-dance pattern are a doji, then expect better performance. Nearly all of the color combinations beat the benchmark (rank 6, $48.01, where I ignored candle color and picked any two adjacent price bars).

In an uptrend, a 2-dance pattern with an upward breakout results in the best performance, especially if the second candle is a doji. The best performance comes when the 2-dance is a continuation of the uptrend.

The lower left half of the table shows the performance when the 2-dance pattern had an upward breakout even though price trended downward before the start of the 2-dance pattern. In other words, the 2-dance pattern acted as a reversal of the downtrend.

Notice that the top ranked doji as the second candle performed best in this test but also beat the uptrend results ($147.86 versus $110.18). In other words, 2-dance patterns acting as reversals outperformed the same pattern acting as a continuation of the uptrend. As you scan down the table and compare the results with the top half, you'll see that the bottom results beat the top results. In short, reversals outperformed.

I set the rank according to the uptrend portion of the table. In the downtrend half of the table, the top three performers remain the top three. In other words, the best performance comes when the second price bar in the 2-dance pattern is a doji. That's the same result as the uptrend study. The lower half of the table shows some mixing of the rank. The black-white color combination remains in last place, though.

Findings

• Doji, as one of the price bars in the 2-dance pattern, shows superior performance, especially if the doji is the second candle.
• Reversals of the downtrend outperform continuations of the uptrend.

2-Dance: Body Overlap

I already explained what a body looks like for a candlestick, but let's review. The body of a candle is the portion between the opening price and the closing price.

In the adjacent figure, the body is the black square. In the 2-dance pair at A, the two white bodies share complete overlap. Pair B does not share body overlap.

I divided the results into body overlap and inside/outside days. Inside and outside days are two special patterns. The inside day has the second price bar inside the high-low range of the first bar. The outside day has the reverse, where the first price bar is inside the high-low range of the second. The two patterns may or may not have overlapping bodies.

Aesthetics aside, how important to performance is body overlap? Let's look at what the data says.

Look at the first place winner in each portion of the table. We find that 2-dance pairs with some overlap outperform in three of four combinations. Only the top row shows better performance from 2-dance patterns with no overlap (and of the four first-place winners, the top row has the lowest average profit per trade). The benchmark did not pay any attention to overlap, so the two price bars may or may not have had overlapping bodies.

Look at the inside/outside day portion of the table. The inside day pattern performed best. The inside day acting as a reversal of the downtrend with an upward breakout posts the most average profit per trade: $95.02.

Findings

• A 2-dance pattern that is an inside day shows the best performance.
• Some body overlap helps performance except after an upward breakout in an uptrend (where no overlap is best).

2-Dance: Height Overlap

Does height overlap influence performance? Look at the chart. 2-dance pair A has complete overlap (the area between the two green lines). The high and low prices match. Pair B has less overlap between the two price bars.

I measured overlap by comparing the area of overlap to the height of the 2-bar pattern. In pair B, the overlap from the left candle measures from the day's high to the opening price, compared to the height of the 2-bar candle pattern. The height of pair B is the high on the second candle to the low of the first candle. The overlap for candle B is between the two green lines.

Let's look at the results.

I'll show a picture of the results next, but let's look at the numbers. Breakout direction means the stock moved above the 2-dance pattern, triggering a buy stop placed a penny above the taller of the two price bars in the pattern. The trend direction is the direction of the 5-day price trend before the 2-dance pattern.

The left column lists the amount of overlap the first price bar had with the second as a percentage of the 2-bar's height.

For example, when the price bars had little overlap in an upward price trend, the trades made $76.58. As overlap increased, the performance deteriorated until the 90% range. There, performance spiked to $97.85 per trade.

The chart shows a visual representation of the table's results.

Line 1, the blue line, has a falling trend until a spike at the end. It's U-shaped, but mostly down. This is the 2-dance acting as a continuation pattern.

Line 2, the best performer, highlights how well reversal patterns work compared to continuation patterns (line 1). The line show a slight downtrend but holds steady until an overlap of 80% to 89% where the line dips, followed by a quick recovery.

Findings

• Reversals outperform continuation patterns.
• The higher the price bar overlap, the worse the performance, but the influence is slight.

2-Dance: Candle 1 Height

Instead of another big table, I'm only showing the results in a chart. For small sample counts (below 30), I replaced the value with 0. That happened twice in the 10% column. I don't show a 0% column because of too few samples.

This chart shows the height of the first candle in the 2-dance pattern as a percentage of the height of the entire pattern. This is not a measure of overlap. It's a height (candle 1) versus height (2-bar pattern) comparison. The horizontal scale is a percentages representing how tall the first price bar is to the height of the 2-dance pattern.

Line 2 has highest point on the chart, but uses only 31 samples, so it would likely drop with additional samples. The line represents the performance (average profit per trade) for upward breakouts from the 2-dance patterns in a downtrend. The candle's height in this column represents those candles with a height from 10% to 19.99% of the total pattern's height. In other words, the first price bar is short and the second one is long.

For the two lines, from 30% and after, the performance doesn't vary much.

Findings

• The height of the first price bar in the candle has almost no influence on performance.

2-Dance: Candle 2 Height

I checked the second candle height as a function of the dance pattern's height and mapped that against performance (average profit per trade).

The chart shows the results. I removed low sample counts, so the horizontal scale ranges from 20% to 100%. For example, those trades with upward breakouts in a downward price trend (line 2) where the second price bar in the dance pattern represented 20% to 29% of the total height, they made $132.68 of average profit per trade in 89 trades. Line 1, where the price trend leading to the dance pattern was upward, made almost the same: $131.66 per trade.

Both lines show that as the second price bar in the pattern gets taller, performance decreases.

Findings

• As the height of the second price bar in the pattern increases, profit drops. This suggests an inside day pattern has promise.