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.
Comment