Candlestick Patterns: How efficient is the Bullish Engulfing Pattern on BTC trading?

in HODL2 months ago

As you may know, the knowledge of Trading Patterns are one of the most powerful assets that a trader can have in order to identify opportunities in the market aside from the Elliot Waves theory, knowledge and use of indicators, Fibonacci retracements and projections etc...

Actually, the combination of a few tools can provide us with more certainty on the decision making process of taking a trade or leave it as well as the anticipation for opening or close a position.
I confess I enjoy day-trading, I find it exciting and, if I have the time, I used to search for opportunities that the crypto market might offer so, that's why sometimes I am sharing in my blog some of them.

I have to say that Trading is a permanent learning process, the amount of information on the matter, on top of thousands of advisers that you may find in the net is certainly overwhelming. However, to differentiate high quality information from the "rubbish" is not an easy task and many leave the learning process while getting frustrated by the bad performance of their trades or losses because they quit before learning about.

For instance, I am sure you have heard and read about some trading patterns you can use in order to base your decision regarding trading a particular token/asset...
There are simple and complex patterns as The Head and Shoulder, Cup & holder, triangles/pennants/flags, Adam & Eve .... that can be identified easily and also, you can find some numbers about how accurate/successful they can be, actually I recommend you to have a look to this page where you can find an estimation of the accuracy of those patterns. For instance, the accuracy/efficiency on the estimation of the price action for the "Head and Shoulder Pattern" is around 83% according to their data.

Then, there are simpler and more traditional structures based on the particular combination of certain Candlesticks. I am speaking about the Bullish-Bearish Engulfing , the Bullish-Bearish Doji, the Evening and Morning Star etc...

For this kind of candlestick patterns, I did not find so much information about their accuracy and efficiency. Actually, they are often used in order to identify a reversal of the trend but not as a tool to anticipate the future price.
However, we have the past data in order to try to estimate the output of those patterns as well.

So, in this post I would like to share with you my assessment on the use of the "Engulfing Bullish Pattern" as a tool on which base a long position, independently of any other indicator.

The Engulfing Bullish pattern

"A bullish engulfing pattern is a candlestick chart pattern that forms when a small red candlestick is followed the next day by a large green candlestick, the body of which completely overlaps or engulfs the body of the previous day's candlestick."(Source).

However, I am not going to assess the Daily timeframe but the 4h and 1h timeframe since it is more dynamic and more usable frames for day-trading.

My assessment keeps the following requirements as assumptions of the trade:

  • Entry done on the opening of the next candle after identifying the pattern (see below "entry")
  • VERY IMPORTANT: Risk of Loss limited always to the bottom of the green candle of the pattern (see below "Stop Loss"). The assumption is to set a stop loss always there, limiting the risk but it could be different depending on your risk management.
  • The profitability of the pattern is taken as the maximum achieved before falling below the Stop Loss, of course, it depends on the trader to close position depending on other observations or targets but, here, I just want to see the potential of the indication not the real output.

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Assessment on the 4-Hours Chart since beginning of 2020.

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Only 19 indications found from the beginning of the year till now from which 12 get positive results and 7 negative, which we assume to limit the losses with the stop.

I keep the following data as the most important:

  • Percentage of Success indicator: 63.16%
  • Average of Potential profitability: 7.32%

Reward/Risk ratio: I would take the average potential profitability divided by the maximum potential loss (remember that is cut due to our stop loss rule from explained before) = 2.48 so, for every USD you put under risk you might obtain 2.48 USD

Assessment on the 1-Hour Chart since early July of 2020.

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Here the results are more satisfying in term of "reversal" indication since the percentage of success is 81.25%.
However, the average Potential profitability is lower than the one obtained on the 4h chart assessment.

Reward/Risk ratio: I would take the average potential profitability divided by the maximum potential loss (remember that is cut due to our stop loss rule from explained before) = 5.46 so, for every USD you put under risk you might obtain 5.46 USD

Summary:

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Apparently, the use of the Bullish Engulfing pattern in the 1 Hour chart seems much more efficient in terms of properly identify the "long" trade opportunity while the potential profit seem not so high, that last can be adjusted as well by selecting a good sustainable leverage (not advise :-) ) taking into account that the risk would increase as well.

This assessment just provide some more light on the statistical output of a famous pattern. I will try to complete the assessment with more data as soon as they appear.

Hope you have enjoy it.


I'm sharing only my quick trading Ideas here, not financial advice at all ;-)

@toofasteddie

*Disclaimer: This is just my personal point of view, please, do your own assessment and act consequently. Neither this post nor myself is responsible of any of your profit/losses obtained as a result of this information.


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Great piece of work. Too bad I'm not into trading anymore. What do you think of VET by the way?

Thanks! I really think VET is going to perform really well in the mid term. Also there are some news of VET adoption at Asia. I would bet on VET for sure 😉

Nice post, @toofasteddie!

@tipu curate