Candlesticks Recognition Indicator

[Harry]

The problem with candlesticks is that they mostly do not work. They are just needed for entertainment of bored retail traders.

Let us for example look at bearish engulfing candles on an hourly chart for ES over the last 3 years. There were 656 such bearish engulfing candles. The algorithm for detection of those candles uses a trend filter (as required). Here are the results:

average price move 3 bars (3 hours) after a bearish engulfing candle: + 0.8 ticks
average price move 6 bars (6 hours) after a bearish engulfing candle: + 0.8 ticks
average price move 10 bars (10 hours) after a bearish engulfing candle: + 1.4 ticks

It is easy to show that trades entered at the close of a bearish engulfing candle have a positive expectancy if you interpret them as bullish signals! However, the positive expectancy is not large enough to overcome transaction costs and slippage, if you trade them on an hourly chart.

Summary:

Trading candle sticks on intraday charts is near impossible.
Before you trade any patterns on a daily chart, please backtest them.
You will find that many bearish patterns - such as the bearish engulfing and the bearish harami are in fact bullish patterns, and vice versa.

Again, all these little pictures, this is mostly online theater for retail traders ......

See chart attached.

[koganam]

The problem with candlesticks is that they mostly do not work. They are just needed for entertainment of bored retail traders.

Let us for example look at bearish engulfing candles on an hourly chart for ES over the last 3 years. There were 656 such bearish engulfing candles. The algorithm for detection of those candles uses a trend filter (as required). Here are the results:

average price move 3 bars (3 hours) after a bearish engulfing candle: + 0.8 ticks
average price move 6 bars (6 hours) after a bearish engulfing candle: + 0.8 ticks
average price move 10 bars (10 hours) after a bearish engulfing candle: + 1.4 ticks

It is easy to show that trades entered at the close of a bearish engulfing candle have a positive expectancy if you interpret them as bullish signals! However, the positive expectancy is not large enough to overcome transaction costs and slippage, if you trade them on an hourly chart.

Summary:

Trading candle sticks on intraday charts is near impossible.
Before you trade any patterns on a daily chart, please backtest them.
You will find that many bearish patterns - such as the bearish engulfing and the bearish harami are in fact bullish patterns, and vice versa.

Again, all these little pictures, this is mostly online theater for retail traders ......

See chart attached.

In furtherance of your post, Bulkowski (whom I cited in a different thread related to the same matter), has done comprehensive statistical backtests of the theory of candlesticks, and shows that indeed many of them, as described, are contrary to reality, albeit some have as high as a 60%, or slightly more, probability of working out as described. (One must of course take account of what "success" means, per his methodology).

ref: http://thepatternsite.com/CandleEntry.html

[Harry]

In furtherance of your post, Bulkowski (whom I cited in a different thread related to the same matter), has done comprehensive statistical backtests of the theory of candlesticks, and shows that indeed many of them, as described, are contrary to reality, albeit some have as high as a 60%, or slightly more, probability of working out as described. (One must of course take account of what "success" means, per his methodology).

ref: http://thepatternsite.com/CandleEntry.html

I know the work by Bulkowski, which is one of the few serious approaches to candlesticks that I have seen. Thank you for mentioning Bulkowski here.

Of course some of the pattern do give you an edge on daily charts. My findings were just

-> that any edge is too small to be exploited if you trade the patterns intraday
-> that the edge of a bearish pattern often requires that you treat them as bullish pattern, and vice-versa

[koganam]

I know the work by Bulkowski, which is one of the few serious approaches to candlesticks that I have seen. Thank you for mentioning Bulkowski here.

Of course some of the pattern do give you an edge on daily charts. My findings were just

-> that any edge is too small to be exploited if you trade the patterns intraday
-> that the edge of a bearish pattern often requires that you treat them as bullish pattern, and vice-versa

Well, I too, after foolishly losing quite a bit of money, before writing my backtests, have discovered and agree with you, that by and large, intraday, the edges only exist in hindsight. So much so, that I have actually again incorporated them into my intraday trading(!), but using them exactly in hindsight.

What I do is usually trade a 30m chart (anything faster, and I lose any semblance of being able to follow the action). When I get a signal on my 30m chart, and only after I get the signal, I will check the 15m chart to see if there was one of the so-called reversal signals on it within the last 3 bars. If there was, I am not quite so quick to liquidate my position after I enter it: if there was not, I am much quicker on the draw to take profits. My trading journal says that it has actually made a difference in profitability.

[stocktraderbmp]

For what it's worth Bulkowski's "Busted Pattern" set up / trade has proved one of the most profitable candlestick patterns to trade for me - supporting the general intra-day findings of others.

[Frameshifter]

If you apply volume analysis in addition to these patterns I think you'll find the success rate goes much higher.

[Farmer George]

If you apply volume analysis in addition to these patterns I think you'll find the success rate goes much higher.

Ok. If we are talking inter-day candles, which (western) confirmation indicators have people found useful, in addition to volume? Thanks.