Welcome back to the second part of our exploration of the best bullish candlestick patterns, building upon the insightful findings in Part 1. If you missed the initial dive into our research, you can catch up here. In this continuation, we delve deeper into the realm of medium-term trading, scrutinizing holding periods of 50, 100, and 250 days. Let’s uncover the nuances and patterns that emerge from our meticulous analysis.
Research Methodology:
I conducted a thorough examination, studying 43 candlestick patterns using Python. My analysis revolved around the S&P 500 constituents as of January 2024, using data from Yahoo Finance covering January 2000 to March 2024. I looked closely at daily data for each stock, identifying buy signals diligently, although sell rules were still pending.
I also monitored the performance after each buy signal, checking at intervals of 1, 5, 10, 25, 50, 100, and 250 trading days to assess their effectiveness in both short and long-term scenarios. To make sure these results could work in real life,, I assumed investors bought stocks the day after detecting a signal.
My analysis focuses on trade counts, profitability, average and median trade outcomes, and risk levels based on return variability.
The Best Bullish Candlestick Patterns for Medium-Term Trading (50,100, and 250-day holding period)
From January 2000 to March 2024, the "Stick Sandwich" and "Inverted Hammer" emerged as top performers across 50, 100, and 250-day holding periods.
The "Stick Sandwich" pattern demonstrates increasing median returns with longer holding periods, starting at 3.84% for 50 days and peaking at an impressive 14.19% for 250 days, indicating its consistent performance over time.
Similarly, the "Inverted Hammer" pattern maintains its top 5 ranking across all holding periods, with median returns increasing from 3.67% for 50 days to 14.24% for 250 days, highlighting its versatility in various investment strategies.
Top Candlesticks Sorted by Median %: 50-day holding period
Candlestick pattern | # of Trades | Wins | Losses | % Profitable | Median Return | Std Dev of Return |
Breakaway | 204 | 126 | 77 | 61.76% | 5.89% | 15.09% |
Stick Sandwich | 3,822 | 2,472 | 1,348 | 64.68% | 3.84% | 15.62% |
Inverted Hammer | 34,846 | 21,718 | 13,109 | 62.33% | 3.67% | 16.87% |
Doji Star | 26,803 | 16,688 | 10,100 | 62.26% | 3.62% | 16.59% |
Hikkake Mod | 1,228 | 779 | 448 | 63.44% | 3.51% | 18.03% |
Top Candlesticks Sorted by Median %: 100-day holding period
Candlestick pattern | # of Trades | Wins | Losses | % Profitable | Median Return | Std Dev of Return |
Breakaway | 202 | 129 | 73 | 63.86% | 7.08% | 21.50% |
Stick Sandwich | 3,784 | 2,520 | 1,263 | 66.60% | 6.96% | 22.69% |
Rising and Falling Three Methods | 347 | 230 | 117 | 66.28% | 6.43% | 22.49% |
Inverted Hammer | 34,527 | 22,617 | 11,903 | 65.51% | 6.40% | 24.86% |
Doji Star | 26,602 | 17,253 | 9,338 | 64.86% | 6.24% | 23.99% |
Top Candlesticks Sorted by Median %: 250-day holding period
Candlestick pattern | # of Trades | Wins | Losses | % Profitable | Median Return | Std Dev of Return |
Tristar | 1,515 | 1,082 | 433 | 71.42% | 14.88% | 86.49% |
Inverted Hammer | 33,545 | 23,517 | 10,024 | 70.11% | 14.24% | 65.59% |
Stick Sandwich | 3,680 | 2,593 | 1,087 | 70.46% | 14.19% | 41.18% |
Gravestone Doji | 33,023 | 23,068 | 9,951 | 69.85% | 14.01% | 71.79% |
Dragonfly Doji | 40,721 | 28,573 | 12,141 | 70.17% | 13.87% | 56.87% |
Based on % Profitable Trades
Among the patterns shown below, the "Stick Sandwich," "Inverted Hammer," and "Three White Soldiers" emerged as consistent top performers across 50, 100, and 250-day holding periods.
The "Stick Sandwich" pattern showcased a remarkable ability to maintain high profitability, with its percentage of profitable trades escalating notably with longer durations, reaching an impressive 70.46% over 250 days.
The "Inverted Hammer" showed notable percentages across shorter durations.
The "Three White Soldiers" maintained a strong presence in the top 5 for both the 50-day and 100-day periods.
These results highlight how strong these patterns are, providing traders with dependable signals for making profitable trades over medium-term periods.
Top Candlesticks Sorted by % Profitable Trades: 50-day holding period
Candlestick pattern | # of Trades | Wins | Losses | % Profitable | Median Return | Std Dev of Return |
Stick Sandwich | 3,822 | 2,472 | 1,348 | 64.68% | 3.84% | 15.62% |
Hikkake Mod | 1,228 | 779 | 448 | 63.44% | 3.51% | 18.03% |
Inverted Hammer | 34,846 | 21,718 | 13,109 | 62.33% | 3.67% | 16.87% |
Doji Star | 26,803 | 16,688 | 10,100 | 62.26% | 3.62% | 16.59% |
Three White Soldiers | 1,857 | 1,156 | 699 | 62.25% | 2.76% | 13.26% |
Top Candlesticks Sorted by % Profitable Trades: 100-day holding period
Candlestick pattern | # of Trades | Wins | Losses | % Profitable | Median Return | Std Dev of Return |
Stick Sandwich | 3,784 | 2,520 | 1,263 | 66.60% | 6.96% | 22.69% |
Rising and Falling Three Methods | 347 | 230 | 117 | 66.28% | 6.43% | 22.49% |
Inverted Hammer | 34,527 | 22,617 | 11,903 | 65.51% | 6.40% | 24.86% |
Hikkake Mod | 1,219 | 794 | 424 | 65.14% | 6.16% | 24.21% |
Three White Soldiers | 1,841 | 1,195 | 646 | 64.91% | 5.58% | 19.12% |
Top Candlesticks Sorted by % Profitable Trades: 250-day holding period
Candlestick pattern | # of Trades | Wins | Losses | % Profitable | Median Return | Std Dev of Return |
Tristar | 1,515 | 1,082 | 433 | 71.42% | 14.88% | 86.49% |
Three White Soldiers | 1,829 | 1,300 | 528 | 71.08% | 13.53% | 33.34% |
Rising and Falling Three Methods | 341 | 242 | 99 | 70.97% | 13.58% | 36.86% |
Stick Sandwich | 3,680 | 2,593 | 1,087 | 70.46% | 14.19% | 41.18% |
Closing Marubozu | 204,865 | 143,769 | 61,079 | 70.18% | 13.57% | 52.47% |
Top Candlestick Patterns Based On Risk Vs. Reward For Each Holding Period
I've chosen to analyze candlestick patterns based on risk versus reward by utilizing scatterplots that compare median return and standard deviation. This approach assists me in evaluating the risk-reward profile of each pattern, aligning with my risk tolerance and investment objectives.
Below, you'll find scatterplots for each period, illustrating the relationship between risk and return for every pattern. I've identified the top performers in terms of risk versus return, which are located in the top left quadrant, indicating high returns with low risk. Additionally, I've compiled lists of the top candlestick patterns for each holding period based on their risk-return profiles.
Top Candlestick Pattern for the 50-Day Holding Period:
1. Breakaway
It's important to highlight that I've chosen to focus on a single pattern in this list. Breakaway stands out as the sole contender appearing in the top left quadrant of our analysis. This quadrant signifies patterns that offer the highest returns coupled with low risk, as indicated by the standard deviation of returns.
Top Candlestick Patterns for the 100-Day Holding Period:
Breakaway
Homing Pigeon
Harami
High Wave
These candlestick patterns have demonstrated notable performance based on their risk versus return profile over the 100-day holding period.
Top Candlestick Patterns for 250-Day Holding Period
Here are the top-performing candlestick patterns based on risk versus return for a 250-day holding period:
Stick Sandwich
Doji Star
Rising and Falling Three Methods
Three White Soldiers
Rickshaw Man
So, by comparing price patterns on a risk and reward basis, we gain a deeper understanding of potential opportunities. This this data-driven approach can help investors pick winning stocks, ultimately enhancing their investment strategies and outcomes.
Best medium-term bullish candlestick patterns based on median return, % profitability, and risk vs. reward
This thorough analysis and backtest of candlestick patterns against U.S. large-cap stocks has uncovered numerous significant revelations regarding their effectiveness in predicting stock movements.
Among the patterns analyzed, two stalwarts stand out prominently: the "Stick Sandwich" and "Inverted Hammer." These patterns have consistently demonstrated an ability to generate solid returns and profitable trades across various timeframes, including the 50, 100, and 250-day periods. Their reliability positions them as reliable indicators for effectively forecasting stock movements in the ever-fluctuating market landscape.
Furthermore, the "Three White Soldiers" pattern emerges as a beacon of consistency, for its profitability and well-balanced risk profile across medium to long-term durations.
By strategically integrating these proven patterns—such as the "Stick Sandwich," "Inverted Hammer," and "Three White Soldiers"—into their trading strategies, investors can adeptly navigate the complexities of the market, thereby achieving the optimal equilibrium between maximizing returns and prudently managing risks across a diverse array of timeframes.
Future Research:
In the upcoming weeks, I'll be sharing the results for a similar analysis but applied to 5-minute bar time intervals, providing valuable insights for day traders into the effectiveness of candlestick patterns.
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