[guruji]

I am new to the world of candlesticks and recently started to read about them. I completed a back-test on Doji as a trend-reversal signal. The results are located at:

http://blog.kilotrader.com/2010/05/d...erns-work.html

And they are NOT impressive

What did I do wrong here? Do candlestick signals work?

[Jumper]

Everything works and everything doesn't. Depends on the individual and how they implement it and their risk management. Context is key.

[Kiwi]

Context = Support and Resistance
Context = back to key mas
Context = fib retracements

otherwise they're amusing noise.

[brownsfan019]

I've said it many times before - playing find a shape is a waste of time and energy.

Do candlesticks all by themselves work? Probably not.

Do candlesticks work in conjunction with other forms of analysis? Sure do.

So give up playing find a shape and start to learn how to read a chart and then candlesticks can become a friendly addition.

Also, you should note that candlesticks become less reliable the lower the timeframe. When Steve Nison was not a referral whore and actually writing meaningful work, those charts were daily or LONGER. In other words, you will need a lot more than a random doji to signal a reversal point.

Good luck, it's not quite as simple as finding shapes.

[TheDude]

May be a slight detour but.....

I'd be interested in other peoples thoughts on this idea - which BrownsFan kind of eludes to. Time bars/candles patterns will often use the close as part of that pattern. It is certainly an important element in candle shape. A close on a intraday bar is pretty much random in my opinion. Therefore, patterns relying on a close (like candles) are doomed I tell you. Dooooomed. They may have more meaning on a daily bar because this price represents the price people are happy to hold overnight at, have their positions settled against etc. But in an intraday it isnt significant at all - which is why Browns correctly (IMO) states shape hunting is a fools errand.

[guruji]

OK... back to the topic of discussion. I completed backtesting the doji, bullish-engulfing pattern, bullish harami and the hammer. These tests were conducted over daily candles. The back test data was SP500 stocks over the last 15 years.

I found that over the last 15 years, the doji reversed ~52% of the times and that it is better than the other three patterns

Details are available at : Quantifying Technical Analysis: Summary of Candlestick Backtesting

[james_gsx]

Originally Posted by TheDude »

May be a slight detour but.....

I'd be interested in other peoples thoughts on this idea - which BrownsFan kind of eludes to. Time bars/candles patterns will often use the close as part of that pattern. It is certainly an important element in candle shape. A close on a intraday bar is pretty much random in my opinion. Therefore, patterns relying on a close (like candles) are doomed I tell you. Dooooomed. They may have more meaning on a daily bar because this price represents the price people are happy to hold overnight at, have their positions settled against etc. But in an intraday it isnt significant at all - which is why Browns correctly (IMO) states shape hunting is a fools errand.

I think I know what you're saying, and I agree to an extent. But to add to what Brownsfan said, it's not really find a shape - even on daily data. In reality, the more you watch charts and candles, bars, etc, you really just get a feel for price movement. Therefore, the doji or single bar is meaningless in and of itself (and like you said, closes seem to be random), but understanding how price reacts around certain levels is very beneficial to some.

A better idea, might be to look at what happens around the dojis a program finds. Are there certain patterns, not just technical. Is there increased buying/selling pressure in the tick, etc. There are many ways to analyze a market, some more data intensive than others, but none of it is really wrong or right.

[guruji]

I am not sure pattern hunting is meaningless. A pattern represents a market behavior. It is not predictor of what will happen. And because the human brain is better than the computer at spotting patterns, people try to find it.

A doji, by definition, represents a Close near the Open. When it happens after a few down days it probably means that the buyers are fighting the downturn and find the price attractive enough to jump in. It MAY mean a price reversal is ready to happen.

Also, I agree that looking at one signal in isolation will not work and we need to look at what else is happening. But it is also important to look at one particular signal/pattern in isolation to understand the underlying strength of that particular signal.

At Quantifying Technical Analysis: Summary of Candlestick Backtesting, I completed testing four candlesticks patterns and the results are summarized. In the past 15 years, the doji successfully reversed the price trend the following day in 52% of the opportunities. That, I believe is a good representation of the doji candlestick