I have been working with candlestick patterns for a long time. Bullish engulfing is my favorite because it almost guarantees that the succeeding candle will be green. So, I am sure of a profit, even if it is merely 1%, though usually it is more.

Is there any other candlestick pattern that guarantees profit in any way?

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    en.wikipedia.org/wiki/… – Nate Eldredge Nov 12 '14 at 20:10
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    The words "stocks" and "guarantee" rarely belong together. – Tim S. Nov 13 '14 at 3:31
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    "Yes, but I can't tell you without you first paying me a lot of money!" – Michael Nov 13 '14 at 4:48
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    I'm not sure that the investment-strategies tag is appropriate. Surely this is trading, rather than investing? – Andrzej Doyle Nov 13 '14 at 12:12
  • i am so glad that i started this thread...your enthusiasm is amazing...but sadly there are no answers here.....bullish engulfing reins supreme......i had expected you guys to suggest modifications to morning star and likes.....btw....can u suggest the best forum online to discuss candlestick patterns... – Farrukh Chishti Jan 13 '15 at 9:39

I would go even farther than Victor's answer. There is little evidence that candlestick patterns and technical analysis in general have any predictive power.

Even if they did in the past, of which there is some evidence, in modern times they are so easy to do on computers that if they worked algorithmic traders would have scanned almost all traded stocks and bought/sold the stock before you even had a chance to look at the graph.

While the best technical traders who are very good at quickly using pattern recognition across many indicators as Victor mentioned might be able to add some advantage. The odds that a pattern so simple to code such as Bullish Engulfing would have predictive power is tiny.

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  • That would depend on what time-frame you are trading. If you are a day trader looking at minute charts or 30 minute charts or similar - then yes HFT might have some effect on an individual's trading when it to pattern trading. However if you are a more medium-term trader looking at daily and weekly charts and only place orders after market close - then HFT has very little affect on your trading. And as I mentioned, candlestick patterns combined with other technical indicators can be a very affective tool in picking high probability pivot points in a market. – Victor Nov 13 '14 at 1:20
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    @Victor "Algorithmic" != "HFT". If there is a straightforward technical approach which gives a guaranteed (or even just very likely) profit in the medium-term, then medium-term algorithmic traders would pick up on this and remove the arbitrage. I don't think it's the term that matters; if something can be described algorithmically, then you're trading against robots and are unlikely to think or act quicker than them. – Andrzej Doyle Nov 13 '14 at 9:32
  • @AndrzejDoyle - the thing is the more participants trade a particular pattern in the same manner the more chance the predicted outcome from that pattern will eventuate. If I see a bullish engulfing pattern at the bottom of a downtrend and place a stop buy order to buy at the open of the next day if prices go above the highs of today, then the more people see the same pattern and attempt to trade it in a similar way - the more chance that the price will in fact go up the next morning and I will have my trade executed and be well off to some nice profits from day one. – Victor Nov 13 '14 at 10:14
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    @Victor If that were the case, one would never see any pattern with significant predictive power. Bullish engulfing patterns do exist - my argument is just that they do not guarantee future profit (in line with Jules' answer). – Andrzej Doyle Nov 13 '14 at 12:11
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    If a stock is trading for over a year between 95-100, its a pretty good bet that once it crosses above or below that range there will be a strong breakout. You should never just use technicals but its common sense that something psychologically is happening at those points and are thus good places to put your entry (or exit) trades. Or at least better than some arbitrary spot. Ill go one more: since so many people do use technical analysis, take advantage of that – von Mises Nov 20 '14 at 2:56

I did a historical analysis a few years back of all well-known candlestick patterns against my database of 5 years worth of 1-minute resolution data of all FTSE100 shares. There wasn't a single pattern that showed even a 1% gain with 60% reliability. Unfortunately I don't have spread data other than for a handful of days where I recorded live prices rather than minutely summaries, but my suspicion is that most of the time you wouldn't even earn back the spread on such a trade.

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  • And how were the trades executed? When a candlestick pattern occurs what was your criteria for taking the trade, what were your exit rules and money management rules? Did you also check the positioning of the pattern - for example was a bullish engulfing pattern in a sideways market, at the top of an uptrend or at the bottom of a downtrend? – Victor Nov 13 '14 at 10:21

I love technical analysis, and use candlesticks as part of my technical analysis system for trading mutual funds in my 401K. However, I would never use a candlestick chart on its own. I use combination of candlesticks, 2 different EMAs, MACD, bollinger bands, RSI and hand drawn trend lines that I constantly tweak. That's about as much data input as I can handle, but it is possible to graph it all at once and see it at a glance if you have the right trading platform.

My approach is very personal, not very aggressive, and took me years to develop. But it's fairly effective - 90% + of my trades are winners. The big advantage of technical analysis is that it forces you to create repeatable rules around which you base your trading. A lot of the time I have little attention at all on what fund I am trading or why it is doing well in that particular market condition. It's basically irrelevant as the technical system tells when to buy and sell, and stops you trying to second guess whether housing, chemicals, gold or asian tigers are is doing well right now.

If you don't keep to your own rules, you have only yourself to blame. This keeps you from blaming the market, which is completely out of your control.

I explain many of my trades with anotated graphs at http://neurotrade.blogspot.com/

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    90% hit rate means nothing in itself - if you lose 10 times more when you lose than what you make when you win, that is only a breakeven strategy. A random strategy where you have a target at 0.5% from the entry price and a stop at 5% of the entry price would probably have about 90% winning trades too. – assylias Nov 13 '14 at 10:02

By definition, there are no guaranteed profits. There are sometimes arbitrage opportunities, which are more accessible to some investors than others. In this case, I'm not referring to HFT as that is covered elsewhere on this site already.

At certain times, in certain equity markets, candlestick charts were used for profitable trading, though more for trades set up for weeks or months, not day trading. I am referring specifically to Nikkei 225 equities, in the 1980's and 1990's. I don't know why it was effective, and it hasn't worked for me since then.

I recommend reading and heeding this answer. Some people DO use technical analysis (see "TA is not..." section) as a primary trading strategy, but they are not going to divulge their methods, not here nor anywhere else.

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John Person has a pattern called the High Close Doji that is probably the most reliable signal in the world of candle patterns. I would check out Candle Stick and Pivot Point Trade Triggers. It all I use in trading stocks + forex.

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Nothing is guaranteed - candlesticks are not crystal balls nor is any part of technical analysis. Candlestick patterns used correctly and in combination with other western technical indicators can increase the probability of a trade going into the derived direction, but they are not a guarantee - which is why you should always use stop losses with your candlestick or any trading.

In saying that, another candlestick pattern that can provide high probability trades is the Doji, or a combination of Dojis in a row at a market extreme.

Note that both Engulfing patterns and Dojis work best at price extremes (highs and lows) and in combination with other technical indicators such as an overbought momentum indicator at a market high, or an oversold momentum indicator at a market low.

EDIT - An Example

Here is a sample trade I placed on the 17th October and am currently 15.6% in profit on. See the chart below as it shows taking the trade on the open of the following day after a bullish engulfing pattern appeared at the bottom of a downtrend on the 16th in combination with the Slow Stochastic crossing over in the oversold region (below 20%). I would consider this a high probability trade and have placed an initial stop loss at 10% below my open price in case the trade went against me. As the price moved up I moved the 10% stop loss up as a trailing stop loss. My profit target is set at 25% or $4.00.

How to trade a Bullish Engulfing Candle

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    -1 because you imply that your technical analysis is a valid predictive technique. It's not. As the beginning of your answer you note that there are no guarantees (which is good) but you then go on to imply that you can increased odds with a specific action. You cannot increase the odds, you can only mitigate consequences of market actions. – Matthew Nov 13 '14 at 19:05
  • @Matthew - just because you don't understand how to use technical analysis doesn't mean it doesn't work. I can show you many more trades I have taken but of course your mind is closed on the matter (as are many others here), so no matter how much I show you I know it won't change your mind. I don't go out saying I get 100% of my trades right or even 90% - I actually aim for a 50% to 60% success rate and am right in the middle of that for the current year. I know that this success rate will make some good money. When I go into a trade my first question is - how much can I lose on this trade? – Victor Nov 13 '14 at 21:04
  • @Matthew - I know I don't control the markets and that there are no guarantees, but yes you can increase the probabilities that a trade will go in one direction rather than the other by using complimentary techniques. I challenge you to look at some charts for bullish engulfing patterns at the bottom of a trend or a range and see how many time the price reverses and starts moving up the next day - then look out for how many times the price reverses when a momentum indicator such as a stochastic crosses over in the oversold position. You can also do the reverse at the top of trends or ranges. – Victor Nov 13 '14 at 21:19
  • I made a living doing technical commodity trading for a while so if you want to assume that I don't understand it that's fine, you'll just be wrong. You're looking for things which may tend to have behaviors and then you're taking mitigating actions when they don't have those behaviors. There is absolutely no reason that the market must do something in regards to technical levels. The Stochastic Oscillator doesn't predict action, it describes past action. You're inferring a prediction based on it. – Matthew Nov 13 '14 at 21:47
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    except when they don't, which is often. In that case your gains are heavily dependent on your ability and efforts in navigating the position which is moving against you: what options plays do you make? What hedges can you take? What's your loss limit? These aren't technical in nature, they're fundamental. Most traders get absolutely gored in the market because they don't know how to act when the trade moves against them. Most houses may not trade these inefficiencies because the effort required to navigate around them is too high. But there is no predictive power – Matthew Nov 13 '14 at 22:47

A good poker player lowers the bet on the downside and increases it on the up, by 3 to 10 times. They'll win, and then when the mood swings, generally 3 -5 consecutive downs, it`s time to reduce the bet back to 1.

I gambled for a year fulltime - a guest of the house you might say, and I managed to make a living using this system.

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    -1 Because this doesn't answer the question. – Matthew Nov 13 '14 at 19:42
  • Yeah, as similar as gambling is to the habits of some day traders, one difference is that the game has odds that can be concretely calculated, whereas the market can have any number of other variables changing at any given time. I also think this answer is inappropriate. – NL - Apologize to Monica Nov 13 '14 at 19:59
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    The other participants are the variables in my opinion. – Robert Morris Nov 13 '14 at 21:35

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