Testing the Engulfing Candle Pattern - Daily

[trilogic]

I hate to "optimize", except for trade-management aspects (initial stop, target if any, trailing stop parameters), which is an area where a broad brush is enough anyway - the end performance doesn't change much if you pick these parameters in the correct range (usually, pretty wide).

As for filters, I only use statistical analysis, I try to keep them simple, and grounded into market dynamics, and I rarely revisit them.

For example, I have for P151 a filter that prevents trades entries between 8:30:00am & 8:34:59am (avoid news-induce "noise"), a solid 5min window. The 1min immediately following that 5min-filter is currently net-negative, but I didn't see the rationale for using a 6min filter, instead of a "round" 5min filter.

Interesting. I think I understand. I do agree with simple, as soon as the algo gets too complex I find myself "curve fitting"
hope your on to a nice way of trading the particular market. What is your opinion regarding applying same parameters to many commodities or at least electronic liquid ones ?

 

[dom993]

I think each asset-class has its own personality, and often inside an asset-class you'll find sub-classes with very distinct personalities.

A discretionary trader might say he/she trades the same way different markets, but this is very very very difficult in a programmed system. I have developed for one of my clients a swing-trading system which works across CL, ES, YM, 6E & 6J (btw, the market model is his, and so is the statistical analysis, in that case I have been no more than the software developer). But I would say, this is the exception, not the norm (especially if you think of intraday holding times).

 

[trilogic]

I think each asset-class has its own personality, and often inside an asset-class you'll find sub-classes with very distinct personalities.

A discretionary trader might say he/she trades the same way different markets, but this is very very very difficult in a programmed system. I have developed for one of my clients a swing-trading system which works across CL, ES, YM, 6E & 6J (btw, the market model is his, and so is the statistical analysis, in that case I have been no more than the software developer). But I would say, this is the exception, not the norm (especially if you think of intraday holding times).

Glad you said this. I have found same, just can't lay the same parameters on each commodity or instrument, agree. I also find that volatility really allows for a few "systems" to perform well , or at least mine

 

[Scaleout.Scalper]

Ability to perform well during low volatility seems to be the real challenge in my experience.

 

[trilogic]

Ability to perform well during low volatility seems to be the real challenge in my experience.

right, but.... anyone have that ability ? Even a market maker may have trouble "making" money in low volatility environment

 

[richard patet]

I am working on a little project here. The basic issue is: how useful are these patterns?

Overview: I am defining a bearish engulfing reversal as the current open being greater than the previous close, and the current close less than the previous open. I am only considering these in markets where current prices are in a trend higher, and the previous day was an up day. I am posting this in hopes that someone will check my process in coming to my conclusions.

What I have so far:

The bearish engulfing reversal:

• 
  Filter for bullish trend condition: the current closing price is greater than the trailing 15SMA of closing price

• 
  The previous day was an up day

• 
  Current open greater than previous close

• 
  Current close less than previous open

Definition of a winning engulfing reversal:

• 
  If the lowest price over the next ten trading days is lower than the close of the engulfing reversal day by one standard deviation (trailing ten day.)

• A non winning engulfing reversal is one which does not meet this condition

Preliminary results:

• 
  According to these metrics, the pattern wins 63% of the time
  This is over 515 instances of the pattern in a handful of different stocks.
  Therefore about 324 of these instances were profitable.

Result:

• 
  The logic defined above for a winning position gives similar results over all of the data points... implying that the engulfing reversal is not any different from any other random trading day.

I am not sure what I am doing wrong... or if I am doing anything wrong.

It seems possible that the pattern would win 63% of the time, but is it really possible that on any random trading day, there is a 63% chance of the market trading lower by one standard deviation? This would mean that the pattern is totally, 100% useless, and that other comparable patterns are also 100%, totally useless. Futher more, it may be a reasonable strategy to short sell any random stock on any random day with a limit to exit the trade after the market trades lower by one standard deviation...

In a standard normal distribution, 68.3% of the observations will be within one standard deviation of the mean.... is the short term stock market just a standard normal distribution?

Attached is the Excel Logic for my tests, right click and "Save As" to download.

Thanks for your time...

I have done similar studies ，But I failed。