Candlestick Trading
ByOddmund GroetteCandlestick Trading
Candlesticks are a popular charting tool because they “packs” data recordings into single easy-to-read price bars. The time frame of your choice can easily be interpreted in just one visual look at the chart. All charts on this website use candlesticks. You might agree they are useful for charting but are they useful in making quantified trading strategies? What is the success rate of candlestick patterns?
The success rate (Percent Winners) for candlestick patterns is high: Among all 75 candlestick patterns, 66% beat the S&P 500 over its holding period (de-trended).
Let’s go on to describe how we calculated the success rate for all 75 candlestick patterns:
Table of contents:
What is the success rate of candlestick patterns?
In our recent course about candlesticks, we quantified all 75 candlestick patterns that exist and backtested them on S&P 500 (SPY). The results were much better than we anticipated: Using detrended data (see more about detrending further down) we found out that 50 of the patterns returned better results than a buy and hold strategy over the holding period.
For your convenience, all the results are displayed in the chart below. If you want to see the name of the pattern you need to order our research. We have a special rebated offer that is valid until midnight 6th of July:
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What is detrending?
Detrending is about removing any long-term trends in a dataset. For example, if you have a trading strategy that returns 5% annually while the base security also returns 5% annually, we can argue the trading strategy returns zero return (alpha). All things being equal, you can just as well just buy the security or asset and do nothing. However, the risk performance might be different – drawdowns, for example.
Here is another example of detrending: we must adjust for the long-term trend in stocks: statistics show that the stock market over time rises about 0.04% per trading day (we covered this trend in an article about night and overnight trading). If your trading strategy returns 0.1% per trading day over its three-day holding period, you clearly have a positive strategy.
Encyclopedia Of All 75 Candlestick Pattern With Historical Backtests And Performance Statistics
75 candlestick patterns quantified and ranked (the table is sortable):
The results are summarized in this sortable table:
| Pattern | #Trades | Avg P\L | Max DD | Win Ratio | Profit Factor | Annual Return | Exposure | Rank |
|---|---|---|---|---|---|---|---|---|
| 1 | 5 | 4.15 | -2.43 | 100 | N/A | 0.68 | 0.18 | 1 |
| 2 | 2 | 1.37 | 0 | 100 | N/A | 0.09 | 0.03 | 2 |
| 3 | 10 | 1.3 | -4.41 | 90 | 5.85 | 0.44 | 0.52 | 3 |
| 4 | 47 | 1.04 | -4.96 | 82.98 | 5.36 | 1.64 | 2.58 | 4 |
| 5 | 20 | 0.98 | -3.96 | 80 | 7 | 0.66 | 1.11 | 5 |
| 6 | 106 | 0.73 | -14.34 | 80.19 | 2.92 | 2.59 | 4.94 | 6 |
| 7 | 55 | 0.72 | -9.68 | 74.55 | 2.68 | 1.32 | 2.73 | 7 |
| 8 | 15 | 0.7 | -8.94 | 73.33 | 2.48 | 0.34 | 0.8 | 8 |
| 9 | 25 | 0.67 | -18.63 | 88 | 1.91 | 0.53 | 1.21 | 9 |
| 10 | 1 | 0.66 | -0.48 | 100 | N/A | 0.02 | 0.04 | 10 |
| 11 | 9 | 0.65 | -2.98 | 88.89 | 7.93 | 0.2 | 0.38 | 11 |
| 12 | 58 | 0.62 | -9.27 | 79.31 | 3.27 | 1.21 | 2.58 | 12 |
| 13 | 14 | 0.62 | -2.66 | 78.57 | 8.93 | 0.29 | 0.43 | 12 |
| 14 | 51 | 0.61 | -7.17 | 68.63 | 2.51 | 1.04 | 3.38 | 14 |
| 15 | 46 | 0.6 | -10.19 | 69.57 | 2.49 | 0.91 | 3.05 | 15 |
| 16 | 13 | 0.58 | -9.28 | 53.85 | 1.63 | 0.23 | 0.98 | 16 |
| 17 | 13 | 0.58 | -9.28 | 53.85 | 1.63 | 0.23 | 0.98 | 16 |
| 18 | 122 | 0.57 | -15.7 | 80.33 | 3.86 | 2.38 | 4.81 | 18 |
| 19 | 16 | 0.56 | -3.68 | 75 | 4.43 | 0.3 | 0.62 | 19 |
| 20 | 276 | 0.55 | -16.6 | 71.74 | 2.63 | 5.16 | 13.79 | 20 |
| 21 | 192 | 0.5 | -18.2 | 69.27 | 2.14 | 3.19 | 9.9 | 21 |
| 22 | 115 | 0.44 | -15.34 | 76.52 | 2.31 | 1.69 | 4.76 | 22 |
| 23 | 45 | 0.43 | -12.59 | 62.22 | 1.93 | 0.64 | 1.99 | 23 |
| 24 | 67 | 0.43 | -13 | 79.1 | 2.33 | 0.96 | 2.77 | 23 |
| 25 | 114 | 0.42 | -23.75 | 73.68 | 1.63 | 1.55 | 6.17 | 25 |
| 26 | 50 | 0.42 | -3.88 | 72 | 3.19 | 0.7 | 2.92 | 25 |
| 27 | 25 | 0.41 | -9.93 | 60 | 1.71 | 0.33 | 1.17 | 27 |
| 28 | 69 | 0.41 | -18.01 | 69.57 | 1.54 | 0.88 | 3.95 | 27 |
| 29 | 80 | 0.37 | -25.11 | 68.75 | 1.55 | 0.94 | 4.56 | 29 |
| 30 | 52 | 0.37 | -8.51 | 75 | 2.11 | 0.64 | 2.29 | 29 |
| 31 | 53 | 0.37 | -17.78 | 79.25 | 1.71 | 0.63 | 2.56 | 29 |
| 32 | 54 | 0.37 | -8.96 | 72.22 | 1.98 | 0.67 | 2.13 | 29 |
| 33 | 120 | 0.36 | -22.62 | 70.83 | 1.59 | 1.37 | 6.43 | 33 |
| 34 | 285 | 0.36 | -25.61 | 76.49 | 1.75 | 3.34 | 11.31 | 33 |
| 35 | 112 | 0.34 | -14.34 | 73.21 | 1.92 | 1.26 | 7.08 | 35 |
| 36 | 62 | 0.34 | -12.37 | 74.19 | 1.89 | 0.7 | 2.79 | 35 |
| 37 | 10 | 0.34 | -4.11 | 80 | 2.03 | 0.11 | 0.35 | 35 |
| 38 | 208 | 0.32 | -18.69 | 67.79 | 1.68 | 2.2 | 11.57 | 38 |
| 39 | 45 | 0.3 | -16.79 | 68.89 | 1.39 | 0.41 | 2.59 | 39 |
| 40 | 19 | 0.29 | -7.96 | 63.16 | 1.76 | 0.18 | 0.84 | 40 |
| 41 | 32 | 0.27 | -5.16 | 71.88 | 2.11 | 0.29 | 1.19 | 41 |
| 42 | 9 | 0.26 | -4.11 | 77.78 | 1.72 | 0.08 | 0.33 | 42 |
| 43 | 5 | 0.25 | -1.15 | 60 | 2.99 | 0.04 | 0.18 | 43 |
| 44 | 40 | 0.25 | -9.26 | 72.5 | 1.68 | 0.33 | 1.94 | 43 |
| 45 | 500 | 0.24 | -24.79 | 70 | 1.48 | 3.77 | 24.33 | 45 |
| 46 | 234 | 0.23 | -24.53 | 77.35 | 1.4 | 1.68 | 11.36 | 46 |
| 47 | 234 | 0.23 | -24.53 | 77.35 | 1.4 | 1.68 | 11.36 | 46 |
| 48 | 57 | 0.23 | -8.49 | 64.91 | 1.63 | 0.43 | 2.93 | 46 |
| 49 | 39 | 0.22 | -6.23 | 76.92 | 1.61 | 0.28 | 1.86 | 49 |
| 50 | 13 | 0.16 | -5.84 | 53.85 | 1.39 | 0.07 | 0.66 | 50 |
| 51 | 40 | 0.15 | -10.78 | 77.5 | 1.34 | 0.19 | 2.07 | 51 |
| 52 | 159 | 0.15 | -25.86 | 63.52 | 1.24 | 0.72 | 10.66 | 51 |
| 53 | 15 | 0.15 | -13.08 | 73.33 | 1.14 | 0.06 | 0.6 | 51 |
| 54 | 1 | 0.13 | 0 | 100 | N/A | 0 | 0.01 | 54 |
| 55 | 42 | 0.09 | -22.94 | 61.9 | 1.05 | 0.06 | 2.4 | 55 |
| 56 | 42 | 0.08 | -6.43 | 69.05 | 1.26 | 0.12 | 1.79 | 56 |
| 57 | 58 | 0.07 | -6.89 | 58.62 | 1.14 | 0.12 | 2.98 | 57 |
| 58 | 250 | 0.05 | -34.61 | 66.4 | 1.02 | 0.14 | 12.8 | 58 |
| 59 | 9 | 0.03 | -5.21 | 55.56 | 1.04 | 0.01 | 0.58 | 59 |
| 60 | 74 | 0.03 | -14.53 | 72.97 | 1.03 | 0.04 | 4.01 | 59 |
| 61 | 11 | 0.03 | -3.77 | 63.64 | 1.12 | 0.01 | 0.6 | 59 |
| 62 | 2 | 0.02 | -3.34 | 50 | 1.01 | 0 | 0.14 | 62 |
| 63 | 34 | 0.02 | -14.71 | 67.65 | 0.97 | -0.03 | 1.67 | 62 |
| 64 | 12 | 0.01 | -12.33 | 75 | 0.98 | -0.01 | 0.79 | 64 |
| 65 | 35 | -0.01 | -5.91 | 51.43 | 0.97 | -0.02 | 1.82 | 65 |
| 66 | 97 | -0.02 | -27.87 | 63.92 | 0.93 | -0.16 | 6.96 | 66 |
| 67 | 88 | -0.03 | -11.64 | 60.23 | 0.93 | -0.11 | 4.54 | 67 |
| 68 | 33 | -0.17 | -13.35 | 69.7 | 0.75 | -0.21 | 1.57 | 68 |
| 69 | 31 | -0.2 | -24.24 | 67.74 | 0.76 | -0.28 | 2.16 | 69 |
| 70 | 70 | -0.32 | -34.05 | 61.43 | 0.68 | -0.9 | 5.27 | 70 |
| 71 | 2 | -0.39 | -1.89 | 0 | 0 | -0.03 | 0.15 | 71 |
| 72 | 19 | -0.47 | -16.83 | 47.37 | 0.59 | -0.33 | 1.52 | 72 |
| 73 | 16 | -0.78 | -17.01 | 50 | 0.35 | -0.44 | 1.04 | 73 |
| 74 | 13 | -0.94 | -15.69 | 53.85 | 0.35 | -0.43 | 0.99 | 74 |
| 75 | 7 | -1.57 | -19.75 | 57.14 | 0.34 | -0.42 | 0.64 | 75 |
FAQs
How effective are candlestick patterns?
Candlestick patterns are effective if you use them correctly and backtested both the candlestick pattern and the sell rules.
Which candlestick pattern has the highest success rate?
The candlestick pattern with the highest success rate is the Bullish Piercing Line. The Bullish Piercing Line has the highest win rate among all 75 candlestick patterns we backtested on the S&P 500.
What is the efficiency of a candlestick pattern?
Overall, the efficiency of a candlestick pattern is high, but it depends from pattern to pattern. Some are not good, but most of them produce positive results.
What is the most profitable candlestick pattern?
The most profitable candlestick pattern is Three Outside Down. It produced an average of 0.73% per trade on the S&P 500 from 1993 until today.
Is candlestick trading profitable?
Candlestick trading is profitable if you stick to the best patterns and ignore those who don’t work. We quantified all 75 candlestick patterns and backtested them in the stock market, and the best candlestick patterns have produced good historical results.
What makes candlesticks a popular charting tool, and how do they simplify data interpretation?
Candlesticks are effective for quantified trading strategies. According to the provided data, 66% of the 75 candlestick patterns outperformed the S&P 500 over their holding period in the backtesting process. Candlesticks are popular due to their ability to condense data into easily interpretable price bars. The visual representation aids in quick comprehension of market trends, including open, high, low, and close prices.
Why are all charts on this website specifically using candlesticks?
Consistency in charting tools, specifically with candlesticks, is maintained throughout the website to provide a uniform and user-friendly experience. Users can easily compare different sections of the site with a standardized charting format.
How does detrending affect the assessment of trading strategy returns, and why is it crucial in understanding risk performance?
Detrending is crucial for removing long-term trends from the dataset, ensuring an accurate assessment of candlestick pattern performance. Detrending adjusts for long-term trends, allowing a more accurate evaluation of trading strategy returns. This is crucial for understanding risk performance, particularly in assessing factors like drawdowns that may impact overall strategy effectiveness.
You might like to read all our other articles about candlesticks
- Performance of the 10 best candlestick patterns
- Do candlesticks work? A quantitative test of 23 candlestick patterns
- 3 bullish candlestick patterns that work
- What is the best time frame for candlesticks?
- How many candlestick patterns are there?
- Candlestick pattern – doji
