Algorithmic Trading Tips 07.
CANDLESTICK PATTERN RECOGNITION.
HOW TO FIND BEST PERFORMING STOCKS AND THE BEST RISK/REWARD OPPORTUNITIES BY IDENTIFYING PROMISING CANDLESTICK PATTERNS.
How to auto-detect candlesticks in a chart, back-test its profitability and get an alert immediately if a new one occurs – that’s what you see and read in this Trading Tips issue. Furthermore, we show you how to trade your entire portfolio of stocks according to particular candlestick chart pattern.
FIG. 1: BULLISH ENGULFING PATTERN OFTEN SHOW TREND REVERSALS.
This pattern is basically a visualization of the pain that short traders must endure when the trend is reversing. Traders might try their luck on the bullish side after reversal as a psychological reaction to the loss on the short position. This is exactly what happened in the graph above. The bullish engulfing tends to be a good indicator for changing market sentiment, albeit temporary.
Have a look at the chart below. It shows all bullish engulfing patterns on Dow Jones Industrial over the last year. This simple pattern was quite good indicator of turning points on many occasions.
FIG. 2: TURNING POINT INDICATION AT A CHART OF DOW JONES INDUSTRIAL AVERAGE DURING 2013.
How to chart this graph on your own and see a turning point indicator based on the bullish engulfing pattern within the favorites list? Very simple:
- 01. Open a chart for your underlying.
- 02. Drag and drop the “candle pattern” indicator onto the chart.
- 03. Go to the properties section on the right. Identify and select a candlestick pattern you want to use.
Scan for Candle patterns.
It is often useful to get automatic alerts based on candlestick patterns across a universe of underlings. You can implement this by using market scanner. It will enable you to find all bullish engulfing patterns (or whatever candlestick pattern you desire) within a few seconds:
- 01. Go to the symbol lists and select a list to scan
- 02. Right click and select “open in market scanner”
- 03. Click done.
- 04. Drag and drop the candlestick pattern indicator onto this list
- 05. Select bullish engulfing on the properties page
- 06. Run the scan.
You can do the same with the “candle patterns” indicator instead of using the “candle pattern” indicator. It has the same effect, however, the “patterns” indicator provides all possible candlestick patterns, whereas the “pattern” indicator only applies one single pattern to your chart.