From time to time I receive a question at www.YourTradingCoach.com asking the winning percentages, or accuracy rates, for each of the individual candlestick patterns.
It’s a reasonable question. The trader is hoping that by establishing the probabilities of success or failure, they can then focus more on the higher probability patterns and minimise their exposure to losses.
In fact, I remember wondering this myself when I first learnt the various candlestick patterns.
The simple answer is that I don’t have any ‘percentage success rate’ figures which I can share.
However, the more accurate answer is a little more complicated.
Essentially, I believe the question is wrong, and any winning percentage figures that you may obtain through other sources have questionable value.
Let’s look at some of the factors which I believe render the data useless.
(1) Past samples of data are not necessarily representative of future samples of data. Of course, any fan of mechanical systems and backtesting may disagree with this, which is fine (the remainder of the factors discussed below should be sufficient to convince you that any published success rates are worthless)
This is a huge topic, certainly worthy of a full article on its own. For now though, let’s just consider this. Although the sample sizes used in producing these statistics are usually in the thousands, there will be significant variability in winning percentages between subsets of the sample. Break the sample into subsets of twenty trades, for example. All results will vary somewhere between the worst group of 20 and the best group of 20. And typically, this will be quite a range of results.
The reality of trading is that your first live sample of 20 trades for each pattern is potentially going to be worse than the average figure. Hopefully not at the lower end of the range, but certainly there’s a good likelihood of worse than average
I don’t know of many novice traders (actually, none) who would be willing to continue testing the concept beyond 20 trades, when results are not matching what was (in their opinion) promised.
The nature of the market is ‘uncertainty’. The historical probability of pattern success is unlikely to match the future probability. If you want to use published win percentage results, plan for worse performance in your live trading.
(2) What rules were used in defining the patterns? Although most sources use similar definitions, there are at times slight variations.
If your candle definitions do not match those used by the team who compiled the winning percentages, then the reported percentages will not be representative of your patterns. If you use any published figures, be sure that they also share the exact definition they used for each pattern. Most studies don’t appear to do this.
(3) Did the entry have to be triggered for the pattern to be included in the sample, or were all patterns considered, whether triggered or not?
If it had to be triggered in order to be included in the sample data, where did they define the entry? Did they use the closing price of the pattern? Did they use the open of the following candle (which may vary from the closing price if the market or timeframe often gaps)? Did they use a breakout of the pattern high/low? If they did use a breakout, was the entry triggered as soon as price broke the level, or on a close beyond the level, or on a breakout of the candle which closed beyond the level. All these different entry techniques will vary the results.
If we look at the following diagram, you can see that different entry methods result in different outcomes.