Backtest the Hammer

This is the second post in my three part series of backtesting a few candlestick patterns. Earlier, I back-tested the Bullish Engulfing Pattern. Today, I will back test the Hammer.

Quantifying the Hammer

A Hammer pattern is formed when all the following conditions should be met :

1. today's bar is white (up day) followed by three down days
2. Candle's body height is less than 40% of the total candle height
3. Close is located near the top of the candle

Back Testing the Pattern
 
DataSet : SP500
BackTest Period : 15 years

Buy Signal :

•  Look for 3 consecutive down days
• A Hammer candlestick is formed on the fourth day
• Buy at Open on the fifth day

Sell Signal:

• Sell on the sixth day

Performance

I am only interested in finding out if this particular signal does act as a trend reversal signal. I am not interested in building a trading system. The best performance measure for this task is the Win-Rate as it represents the probability that my hypothesis is correct.

PERFORMANCE
Number of Trades	3,787		Winning Trades	1,813		Losing Trades	1,974
Average Profit %	-0.21%		Win Rate	47.87%		Loss Rate	52.13%
Average Bars Held	2		Average Profit %	2.68%		Average Loss %	-2.86%
			Average Bars Held	2		Average Bars Held	2

  

Setup