Do you think you can trust trading gurus?
Many trading gurus and books will show you a candlestick pattern, and say with high confidence that the price will go up or down.
For example, everyone and their neighbor’s dog thinks that engulfing candlestick patterns actually work.
Books show pretty hand-picked charts.
Gurus make it sound easy.
But do you know their actual win rates?
I mean, I have tested the engulfing pattern before on the Trading Rush channel.
It got around a 55% win rate, which says it works and all.
But I did the test with the trend.
I used the 200 moving average to take trades in the direction of the trend.
Do you know if the engulfing pattern works on its own or not?
If it doesn’t, what’s the point of using it even with the trend?
Maybe the trend is making it work, don’t you think?
So to find the truth, I decided to test it on its own.
I spent two days testing over 10,000 trades.
I used an engulfing pattern indicator to make sure I don’t have to manually hand-pick the candle pattern.
This will keep the data unbiased.
No guessing.
No cherry-picking examples.
But then I got really confusing results.
I tested on the 1-day timeframe to get the highest quality candlestick patterns with low market noise.
I tested on major stock market indices, forex and bitcoin.
In forex and bitcoin, the engulfing candlestick patterns were useless.
They gave around a 50% break-even win rate.
But on most stock market indices?
Bullish patterns worked around 55 to 67% of the time!
It consistently worked and gave a really high win rate on most stock market indices.
This seemed amazing.
Maybe the gurus and books were right after all.
But then something felt wrong.
Wait a minute.
On this S&P500 stock market chart, if bullish patterns worked 60% of the time, why did bearish patterns only work 45% of the time?
That’s weird.
In a fair market, both engulfing patterns should get a profitable win rate, right?
I did many tests after this.
But then I tried something crazy.
What if I flipped everything backwards?
What if I told the computer that bullish engulfing patterns actually mean prices go DOWN?
And bearish patterns mean prices go UP?
Completely opposite of what the books and trading gurus say.
But then the results were interesting.
The numbers flipped, too!
Now, bullish patterns only worked 39% of the time.
Bearish patterns jumped to a 54% win rate.
This was impossible if the engulfing patterns actually worked on their own.
But then the truth hit me.
The stock market, especially the stock market indices, go up most of the time.
So ANY pattern that says “buy” will look good, even if it’s totally random.
Even if you buy every time your neighbor’s dog barks, it would probably “work” in an uptrending market.
So, this whole time, I was getting a high win rate in the stock market, not because the engulfing pattern actually worked, but because the uptrend made it work.
In reality, the data of more than 10000 trades says, yes, most candlestick patterns are pretty much useless on their own.
They have pretty much no edge.
But hold on, then why did I say that the engulfing pattern gets a high win rate in the Trading Rush price action series?
Even in the How I made 100% profit in a year stock market series, why did I say I got a high win rate with it again?
Well, you see, in both series, I use the candlestick pattern at some form of support resistance.
According to data from previous testing videos, we know that my method of drawing the support resistance area works around 60% of the time.
So, when the price comes near a support and gives a bullish engulfing pattern, it’s telling a story.
It’s saying that the buyers are now stronger than the sellers.
At a support area, that’s exactly what we need.
And that’s why I use it as an entry point.
It showed me what I want to confirm, the switch from higher selling pressure to higher buying pressure.
Since I know my support resistance work around 60% of the time, I can directly buy at the support without any confirmation as well.
But if I’m clearly seeing that the price is still showing selling pressure using red candles, then buying directly without any confirmation of buying pressure will be a low-quality entry.
That bullish engulfing confirmation slightly increases the quality of the trades because I get to take the trade after the buying pressure gets higher.
That’s why I like to use it as an entry pattern near support resistance.
But as the data said, an engulfing candlestick pattern on its own is pretty useless.
So, when you see an engulfing or any other candlestick pattern at a random place, maybe don’t focus on it too much.
Focus on the trend, support resistance, and other things first.
Because those are the things that actually make the engulfing and other candlestick patterns work according to data.
That’s all!