Quantifying the B-E Pattern
A Bullish-Engulfing pattern is formed when all the following conditions should be met :
- today's bar is white (up day)
- yesterday's bar is dark (down day)
- today's trading range is larger than yesterday's
- today's close is greater than yesterday's open
DataSet : SP500
BackTest Period : 15 years
Buy Signal :
- Look for 3 consecutive down days
- A Bullish-Engulfing candlestick is formed on the fourth day
- Buy at Open on the fifth day
- 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 | 6,268 | Winning Trades | 2,858 | Losing Trades | 3,410 | ||
Average Profit % | -0.37% | Win Rate | 45.60% | Loss Rate | 54.40% | ||
Average Bars Held | 2 | Average Profit % | 2.56% | Average Loss % | -2.83% | ||
Average Bars Held | 2 | Average Bars Held | 2 |
In this particular example, there are two things I would like to note :
- Bullish Engulfing patterns happen quite often. For the SP 500 stocks in the last 15 years, they showed up about 400 times in one year
- They are NOT very good at predicting a trend reversal. For the SP 500 stocks in the last 15 years, they were correct only 45% of the time
Buy Setup
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