Backtesting Bullish Engulfing Pattern

In my blog post yesterday, I said that I will be back testing three candlestick patterns. Today, it is the Bullish Engulfing Pattern.

Quantifying the B-E Pattern

A Bullish-Engulfing pattern is formed when all the following conditions should be met :

1. today's bar is white (up day)
2. yesterday's bar is dark (down day)
3. today's trading range is larger than yesterday's
4. today's close is greater than yesterday's open

Backtesting the pattern

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 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	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