Based on a backtest of 43 candlestick patterns on 500 U.S. large cap stocks over a 23 year period.
Have you ever wondered if indicators you read about in blogs or books actually work? Unfortunately the majority of them do not and this is one reason why many authors don’t provide backtested results. If they did, they would have a lot less to write about.
In my quest to demystify bullish candlestick patterns, I meticulously studied their performance across hundreds of U.S. Large Cap stocks over the past two decades. This exploration not only reveals which patterns truly predict an uptrend but also equips you with actionable information about which patterns you can add to your investment strategy.
Before I reveal the results, let’s make sure you understand what backtesting is, what candlestick charts and chart patterns are, and finally my research methodology.
What is backtesting?
Backtesting refers to the process of testing an indicator or trading strategy on historical data to see how it would have performed in the past.
What are candlestick charts?
Candlestick charts are financial chart. The bar colours are based on if the price increased or decreased relative to the prior period. Meanwhile, the price range between the open and close represent the body, and the high and low are depicted by the cande "wicks".
What are candlestick patterns?
Candlestick patterns are specific formations created by one or more candlesticks, which traders use to predict potential future movements in the market. These patterns can indicate reversals, continuations, and various other aspects of market sentiment. Some of the most well-known bullish candlestick patterns include: Bullish Engulfing, Inverted Hammer, Bullish Harami. Below is an example of a Three White Soldiers pattern, which is defined as three consecutive "up" bars to mark the end of a downtrend, similar to the 3 highlighted bars in the chart below.
Research Methodology
I backtested 43 candlestick patterns using Python, analyzing data from all 500 stocks in the S&P 500 as of January 2024. The historical data, sourced from Yahoo Finance, spans from January 2000 - March 2024. For each stock, I applied the patterns to daily data to identify buy signals. Since I have yet to identify sell rules, I tracked the subsequent performance of each buy signal over the next 1, 5, 10, 25, 50, 100, and 250 trading days to evaluate short vs. long-term effectiveness. I then aggregated the results per pattern, which you will find in the next section. In order to ensure that these results could be achieved in the real world, my results assume an investor bought the stocks at the end of the next trading day after the signal was obtained.
The results are focused on the number of trades, the % profitability, average and median trade performance and level of risk, as identified by the standard deviation of returns.
The best bullish candlestick patterns for short-term trading (1, 5, 10, 25 day holding periods)
Based on Median Return %
The following patterns appear most frequently in the top 5 performers for highest median return across the four short-term timeframes, indicating their robustness and effectiveness in predicting stock upward price movements, are the "Breakaway," "Inverted Hammer," and "Stick Sandwich."
The Breakaway pattern is the most consistently high performer, appearing in all four tables (see below) with increasing median returns as the holding period extends.
The Inverted Hammer is another pattern demonstrating robust performance across multiple holding periods, specifically appearing in three out of four tables.
The Stick Sandwich pattern, while not appearing in the 1-day holding period table, makes a strong showing in the 5, 10, and 25-day
Top 5 Candlesticks by Median Return %: 1-day holding period
Candlestick pattern | # of Trades | Wins | Losses | % Profitable | Median Return | Std Dev of Return |
Hikkake Mod | 1237 | 671 | 552 | 54.24% | 0.13% | 2.44% |
Breakaway | 211 | 111 | 99 | 52.61% | 0.13% | 3.25% |
Inverted Hammer | 35114 | 18384 | 16402 | 52.36% | 0.10% | 2.63% |
Ladder Bottom | 4038 | 2119 | 1891 | 52.48% | 0.10% | 2.53% |
Doji Star | 27032 | 14170 | 12668 | 52.42% | 0.10% | 2.50% |
Top 5 Candlesticks by Median Return %: 5-day holding period
Candlestick pattern | # of Trades | Wins | Losses | % Profitable | Median Return | Std Dev of Return |
Counterattack | 1385 | 785 | 595 | 56.68% | 0.58% | 5.55% |
Breakaway | 211 | 125 | 85 | 59.24% | 0.57% | 5.27% |
Inverted Hammer | 35101 | 19805 | 15144 | 56.42% | 0.55% | 5.71% |
Stick Sandwich | 3838 | 2144 | 1678 | 55.86% | 0.54% | 5.31% |
Piercing | 9235 | 5196 | 4014 | 56.26% | 0.52% | 5.07% |
Top 5 Candlesticks by Median Return %: 10-day holding period
Candlestick pattern | # of Trades | Wins | Losses | % Profitable | Median Return | Std Dev of Return |
Breakaway | 210 | 123 | 87 | 58.57% | 1.33% | 7.04% |
Stick Sandwich | 3836 | 2237 | 1590 | 58.32% | 1.06% | 7.29% |
Hikkake Mod | 1236 | 729 | 504 | 58.98% | 1.02% | 7.50% |
Inverted Hammer | 35054 | 20308 | 14665 | 57.93% | 0.98% | 7.55% |
Ladder Bottom | 4030 | 2308 | 1712 | 57.27% | 0.94% | 7.61% |
Top 5 Candlesticks by Median Return %: 25-day holding period
Candlestick pattern | # of Trades | Wins | Losses | % Profitable | Median Return | Std Dev of Return |
Breakaway | 210 | 128 | 82 | 60.95% | 2.35% | 10.48% |
Stick Sandwich | 3822 | 2277 | 1537 | 59.58% | 2.15% | 11.45% |
Inverted Hammer | 34983 | 21037 | 13902 | 60.13% | 2.09% | 11.96% |
Gravestone Doji | 34300 | 20278 | 13969 | 59.12% | 1.89% | 11.59% |
Doji Star | 26927 | 15868 | 11039 | 58.93% | 1.87% | 11.55% |
Based on % Profitable Trades
The 4 tables below identify the top 5 most reliable patterns, per holding period, based on the percentage of profitable trades. The "Breakaway," "Inverted Hammer," "Hikkake Mod," and "Stick Sandwich" patterns emerge as the most robust based on profitability, given their frequent appearance across the different holding periods.
The Breakaway pattern stands out for its consistency, appearing in all four tables with a notable increase in the percentage of profitable trades and median returns as the holding period extends.
The Inverted Hammer also demonstrates strong performance, particularly in longer holding periods (5, 10, and 25 days).
The Hikkake Mod pattern showcases its versatility by appearing in all tables, with its percentage of profitable trades increasing significantly as the holding period grows.
Lastly, the Stick Sandwich makes a strong showing in the 10-day and 25-day holding periods.
Top 5 Candlesticks Sorted by % Profitable Trades: 1-day holding period
Candlestick pattern | # of Trades | Wins | Losses | % Profitable | Median Return | Std Dev of Return |
Hikkake Mod | 1237 | 671 | 552 | 54.24% | 0.13% | 2.44% |
Breakaway | 211 | 111 | 99 | 52.61% | 0.13% | 3.25% |
Ladder Bottom | 4038 | 2119 | 1891 | 52.48% | 0.10% | 2.53% |
Doji Star | 27032 | 14170 | 12668 | 52.42% | 0.10% | 2.50% |
Inverted Hammer | 35114 | 18384 | 16402 | 52.36% | 0.10% | 2.63% |
Top 5 Candlesticks Sorted by % Profitable Trades: 5-day holding period
Candlestick pattern | # of Trades | Wins | Losses | % Profitable | Median Return | Std Dev of Return |
Breakaway | 211 | 125 | 85 | 59.24% | 0.57% | 5.27% |
Counterattack | 1385 | 785 | 595 | 56.68% | 0.58% | 5.55% |
Inverted Hammer | 35101 | 19805 | 15144 | 56.42% | 0.55% | 5.71% |
Piercing | 9235 | 5196 | 4014 | 56.26% | 0.52% | 5.07% |
Hikkake Mod | 1237 | 692 | 540 | 55.94% | 0.47% | 5.99% |
Top 5 Candlesticks Sorted by % Profitable Trades: 10-day holding period
Candlestick pattern | # of Trades | Wins | Losses | % Profitable | Median Return | Std Dev of Return |
Hikkake Mod | 1236 | 729 | 504 | 58.98% | 1.02% | 7.50% |
Three White Soldiers | 1875 | 1102 | 770 | 58.77% | 0.84% | 6.18% |
Breakaway | 210 | 123 | 87 | 58.57% | 1.33% | 7.04% |
Stick Sandwich | 3836 | 2237 | 1590 | 58.32% | 1.06% | 7.29% |
Inverted Hammer | 35054 | 20308 | 14665 | 57.93% | 0.98% | 7.55% |
Top 5 Candlesticks Sorted by % Profitable Trades: 25-day holding period
Candlestick pattern | # of Trades | Wins | Losses | % Profitable | Median Return | Std Dev of Return |
Breakaway | 210 | 128 | 82 | 60.95% | 2.35% | 10.48% |
Inverted Hammer | 34983 | 21037 | 13902 | 60.13% | 2.09% | 11.96% |
Stick Sandwich | 3822 | 2277 | 1537 | 59.58% | 2.15% | 11.45% |
Three White Soldiers | 1870 | 1109 | 758 | 59.30% | 1.63% | 9.37% |
Hikkake Mod | 1232 | 730 | 501 | 59.25% | 1.85% | 11.99% |
Top candlestick patterns based on risk vs. reward for each period
I've chosen to use scatterplots to compare median return vs. standard deviation since it allows us to visually evaluate the risk versus reward of the 43 candlestick patterns that were tested.
Below are scatterplot charts for each period, highlighting the risk vs. return relationships for each pattern. The top performing patterns based on risk vs. return will appear in the top left quadrant (highest returns with the lowest levels of risk or standard deviation of returns). Under each chart, you will also find a list of top performing candlestick patterns based on risk vs. return for the respective holding period.
Top performing candlestick patterns based on risk vs. return for 1-day holding period:
1. Hikkake Mod
2. Doji Star
3. Ladder Bottom
4. Harami Cross
5. Stick Sandwich
Top performing candlestick patterns based on risk vs. return for 5-day holding period:
1. Piercing
2. Tristar
3. Three White Soldiers
4. Tasuki Gap
5. Three Line Strike
Top performing candlestick patterns based on risk vs. return for 10-day holding period:
1. Breakaway
2. Rising and Falling Three Methods
3. Three Line Strike
4. Three White Soldiers
Top performing candlestick patterns based on risk vs. return for 25-day holding period:
1. Breakaway
2. Gap Side-by-Side White
3. Three Line Strike
4. Three White Soldiers
From a risk vs. return perspective, assuming the best candlestick patterns are those that consistently appear in the top left quadrant (as described above), "Three White Soldiers" and "Three Line Strike" are consistently strong performers across a range of holding periods, indicating their potential reliability and effectiveness in trading strategies. "Breakaway" also shows strong performance in longer holding periods (10 and 25 days), suggesting its utility in more extended investment strategies.
Best short-term bullish candlestick patterns based on median return, % profitability, and risk vs. reward
This extensive backtest and analysis of candlestick patterns against U.S. large cap stocks reveals several key insights into their predictive power for stock movements. The patterns that consistently emerged as top performers across various criteria—median return, profitability, and risk versus reward—include "Breakaway," "Inverted Hammer," "Hikkake Mod," and "Stick Sandwich." Notably, "Breakaway" shines for its strong performance over longer holding periods, particularly in the 10-day and 25-day ranges, highlighting its utility in predicting significant upward trends.
Moreover, patterns like "Doji Star," "Piercing," and "Three White Soldiers" also make appearances in top lists for specific holding periods, indicating their situational effectiveness.
As investors or traders seek to navigate the complexities of the stock market, these findings offer a robust framework for employing candlestick patterns as part of a broader trading strategy. Whether aiming for short-term gains with lower risk or seeking more significant returns over extended periods
Additional Research
Check out part 2 of this study, where I share results for the same candlestick pattern backtests assuming longer holding periods: 50, 100 and 250 days.
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