Patterns

I have read a few books on trading, and usually there is some mention (at least) of candlestick patterns, sometimes referred to as Japanese. There have been whole books written on this subject, so this post is just intended as a simple introduction, which may peak your interest. For those with greater interest, here’s a list of a few of the books:

http://www.candlestickpicks.com/books1.htm

I don’t usually trade off patterns, but there are times when a pattern match is reassuring, and is perhaps one more of the technical factors of a trade to consider when doing your homework.

Additionally, my trading software tool from TDAmeritrade, StrategyDesk, has a feature that you can program in a pattern and the screener will automatically look for that pattern in a list of stocks that you give it. It has a backtest feature where you can take a stock, look for that trading pattern, and place a pretend order, and the backtest will tell you the success rate.

I programmed in a couple patterns and ran the backtest. I will do more as I have the time. But here are some of my observations:

Over the last year, almost all of the short trades lost money. That says, don’t use patterns to go contrary to the market direction. I think I heard that the hedge funds last year did not do as well as expected.

Over the last year, more than 75% of the long trades made money when an additional factor of stochastics < 20% was added in to the backtest. The success rate dropped to almost 20% when the factor of stochastics > 80% was added. That says, don’t chase the market. Set your timing and if you miss, well, accept the fact that you’ve missed, and wait for your setup again.

Here are some of the patterns:

http://www.daytradersbulletin.com/html/cs1.html
http://www.candlestickforum.com/PPF/Parameters/16_332_/candlestick.asp

Here is a common candlestick screener. With this one, it will find a daily chart with the most current day matching the pattern you select:

http://beta.stockfetcher.com/csf/


Additionally, I've heard of the following patterns:
1. RR Track
2. +1 -2 buy setup
3. -1 +2 sell setup
4. Gilligan's Island Buy Signal
5. Oreo Cookie down-up-down sandwich
6. The Bird
7. Sherlock Holmes' pipe
8. N/R7 reversal
9. Hanging Man

I'm probably not qualified to comment on these, but I have a kind of idea. Except for the +1-2 and -1+2 setups, which I heard from Cooper. I’ve read his definition of those maybe 30 times and I still don’t get it when in one of his articles he sees this pattern.

So be careful trading patterns Watch your volumes and stochastics, and above all, set stops to protect your capital.

If anybody’s got success stories trading patterns, a comment would be good.