Nothing 'magical' about trading with candlesticks. Simply put, you cannot do a backtest as you 'experimented' with. Candles are not as easy as any average joe saying find me a hammer and then proving they don't work. Candlesticks are to be taken into the context into which they are being viewed. Your view was so narrow and limited that even if they did show positive results, it would mean nothing. Simply put, your experiment was an exercise in futility as you proved nothing. All you proved was how a newbie trader wastes time looking for a grail.
What was amazing to me is that the test didn't even show a 51% success rate. Even if the test was slightly flawed, there should have been some bias one way or the other. I confess that I have never grasped the "magic" element of trading. I read the technical definition of a bearish engulfing pattern and applied a technical test to it. The results came out to 50% which matches results achieved by Bulkowski (see the reference earlier in this thread) for some of the patterns he tested. Next time I will first read tea leaves and sacrifice my pet hamster to the sun god. I am sure the results will come out better.
Man, I am right with you here. Get this shit, I decided I wanted to build my own house. I jumped on Google, downloaded some how-to vidoes. The video said I would need a saw, hammer and nails, and some wood to get started. So I got everything that it told me to get. I started my journey, only to discover that what I built didn't match what the video showed. My guess is that the tools were broken, couldn't be that I didnt know anything, I mean c'mon I watched a how-to video. So the only logical conclusion is that a house can not be built using a saw, hammer and nails, or wood. Sounds stupid, doesnt it? Of course a house can be built out of those materials. Just because the way YOU tested candles didnt work for YOU, does not mean they do not work. Just because you don't know how to use the tools, doesn't make them non-effective. It only means they are useless to you. You said yourself that you need a hard definition in order to test. This is where your problem is. Candles are more art form than science. If you need that science part of it then yes, candles will not work for you.
By "art" I think we are talking about "magic" again. I agree that there is complexity in trading, and you cannot rely on a single signal. But it seems like individual signals should at least show probability to behave one way or the other. Someone is next going to tell me that they use dice to help them trade, and have carefully learned to read the dots, but that they must be combined with other signals.
The answer is YES. Specific ones do. Some are garbage, but if anyone says "no" to this you're 100% wrong.
Ok, believe whatever you want to believe. Somehow you managed to relate reading price-action through the use of candles as well as using the overall technical picture, to that of dice. I do not see how those are even remotely related, but whatever. How long have you been trading? If you think that trading is all black and white, good luck. I am sure there a few 100% mechanical traders, but I would assume that there are more discretionary traders who believe that trading is not all black and white, but more grey. Let's take a look at your definition of a bullish engulfing pattern. Taken from investopedia.com: A chart pattern that forms when a small black candlestick is followed by a large white candlestick that completely eclipses or "engulfs" the previous day's candlestick. The shadows or tails of the small candlestick are short, which enables the body of the large candlestick to cover the entire candlestick from the previous day. Seems simple enough, but what happens if the next day's bar doesn't completely wrap around the previous, say its off a tick or two. By your stringent definition it is no longer valid, but still valid in many candlestick trader's eyes. Then comes your overly simplistic idea of downtrend. Three days of lower lows. Why 3, why not 4,5,or 15? Then comes the overall technical picture. What about support and resistance. Does this pattern appear right below resistance? Is it on or near support? Is there a gap that could cause problems, or a reason not to take a trade. Is the risk worth the potential reward? What about other indicators? Is the market oversold? I could go on and on. All of these ideas, your "test" ignored. So what did you expect? That you found some definition of the internet, got some free data from yahoo, and run an overally simplistic test, and that you found the holy grail? So I agree, that with your "test" candle patterns, as you see fit, do not work. But once again, is it the tool that doesn't work or the one operating the tool???
Thanks, I agree that my idea of a downtrend might have been overly simplistic. I was examining thousands of data points, which seemed like a reasonable sample size. But if 15 days make a downtrend, then I would have at least captured some of those in my 3-day data. And that should have put me above 50%. The same applies to being a few ticks off. I know my patterns completely engulfed the previous day's bar, because that is mathematically easy to define. The pattern definition I used was from one of Nison's books, if I recall, but there was no clear definition of "downtrend" provided, so I stuck with the classic "lower lows" and arbitrarily chose 3 days. Many trading books seem to speak in imprecise terms and avoid any scientific justification for their claims. Alot of them just seem to be "feel good" books that emphasize potential successes and only show the chart where the signal worked. And there are people that give these books 5-star reviews and vow to start their trading career tomorrow. You and I don't disagree about trading being "grey"--our disagreement lies in my belief that shades of grey are measureable. If they're not measureable, then I don't believe they exist. The candles are related to dice in that, if they are entirely random like dice, with no correlation to things that will happen in the future, then they are not contributing anything to your buy/sell decision--it's the other signals that are, or its your money-management abilities, and the contribution of the candles is imaginary. I'm only trying to find out what the truth is. I like the Bulkowski link that someone posted earlier. He evidently likes to measure grey, like I do. I'm sure he did his homework better than me, and he does show many signals that do better than 50%, so put more stock in his results over mine. I only wanted to relate my own story to contribute to the original post. I have not traded actively since 2000--my work kept me too busy, and it was only for a brief time. So I am not speaking from experience. However, I do believe in math and statistics, and I think they can be fairly applied in almost any domain.
Ok, then stick your mathematical models. You run one test, dont actively trade, yet you feel the need to share your "knowledge". Since you like Nison books, try and see how many times he states candles patterns are not a system. But that is exactly what you did. Look at the whole technical picture. But this is neither here nor there. You dont trade. Try following the market open to close for a couple years like I have done, then you can come back here and state your knowledge. I like analogies. You coming here and saying what you are, is like me going to a doctor's office and saying their diagnostic methods do not work because I read something online, and did a simple test that "proved" their methods are just not effective. Sounds ludicrous, I know!
Exactly. If the doctor tells you take hemlock but the test rats you fed it to are dead, you might not want to take the hemlock. I haven't "proved" anything, nor did I make that claim--I only wanted to cast doubt on it for those with an open mind, and contribute to the original post.