3 Bullish Candlestick Patterns That Work – Backtesting and Historical Performance Insights

Very few bullish candlestick patterns work, but this article presents 3 bullish candlestick patterns that work. Even though Candlesticks are a popular charting method, very few patterns have any predictive value. We use candlesticks extensively ourselves for charting because we believe they give an excellent visualization of the price action, even though we never use any candlestick patterns in our quantified trading. Among those who swear to use quantified strategies, traders like us, candlestick patterns have a rather poor reputation. Is it any reason for this negativity?

This article shows you 3 bullish candlestick patterns that work. It turns out, perhaps surprisingly, that some candlestick patterns work reasonably well. We test Bearish Engulfing Pattern, Three Outside Down, and Bullish Harami.

Table of contents:

Do candlesticks work?

Before you continue reading, we would like to remind you of a previous article we did earlier that covered 23 candlestick formations. Most of them failed our quantitative tests, but some patterns and formations performed pretty well and can most likely be improved.

Candlestick patterns and when to exit

We have yet to see any candlestick proponent who has given a specific trading strategy based on backtests of the pattern. Practically all “advice” is based on anecdotal evidence without quantified tests. Moreover, all analysis is mainly based on the entry and very little focus on the exits.

We have covered how and when to exit a trade before.

The quantified tests in this article used a straightforward exit rule: we exit when today’s close ends the day higher than yesterday’s high. We exit on the close:

How to enter and exit positions at the close (for Amibroker and Tradestation)

In which markets do we test 3 bullish candlestick patterns?

We test our candlestick patterns on the S&P 500. We use the ETF with the ticker code SPY as a proxy and the testing period is from its inception in 1993 until October 2021.

Our tests are done by investing 100% of your equity into each trade. This means our results are compounded (CAGR).