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Scoring Candlestick Patterns |
Since early 2001 HotCandlestick.com has offered members a view through the window of candlestick chart analysis. Over 1,000,000 individual occurrences of candle patterns are identified on the daily charts of approximately 10,000 securities tracked by HotCandlestick.com. Members can quickly find patterns that have historically worked well for individual stocks and currencies.
The candlestick pattern scoring system is a statistical analysis approach created by HotCandlestick.com to quantify the historical reward to risk ratio for individual stocks and currencies based on candlestick patterns. Stocks are prone to a variety of market forces, technical and fundamental. HotCandlestick.com developed a scoring system which accounts for variation in stock prices within and between stocks.
The HotCandlestick SCORE measures the past success of a given candlestick pattern for a particular security. Criteria are set such that a stock must have at least 5 instances of a particular candlestick pattern before appearing in this database. The SCORE formula uses the standard deviation of the actual % gains for each of the 5 days following the candle signal. Scoring allows for easy identification of patterns that have worked well for individual stocks by ranking the % gains achieved based on how consistently those gains were achieved.
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Calculate Candlestick Pattern Score
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The formula used to calculate the SCORE of a candlestick pattern for a given security is:
Variables:
n = 1st, 2nd, 3rd, 4th, 5th
x = n Day Median Gain for the given security and candle pattern
y = Standard Deviation of all n Day Median Gains
z1 = Count of the candle pattern found over the entire date range of the database
z2 = Count of the candle pattern found for the given security over the entire date range of the database
Individual Candle Patterns found in white section at top of the "Search Databases" page:
n Day Score for Individual Candle Patterns =
[(x * sqrt(z1)) / (y * y)] * 1000
Individual Securities found at bottom (pink text) on the "Search Databases" page:
n Day Score for Individual Securities =
[(x * sqrt(z2)) / (y * y)] * 1000
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Score Interpretation
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HotCandlestick.com is a candlestick pattern identification data service, not an investment advisory service. Given that fact it is not possible to give out buy or sell recommendations of any kind.
To find which LONG (BUY then SELL) positions worked well in the past you should look for high positive SCORE values. High positive SCORE values represents a historically high reward to risk ratio for LONG positions. Conversely, to find which SHORT (SELL then BUY) positions worked well in the past you should look for large negative SCORE values. Large negative SCORE values represents a high historical reward to risk ratio for SHORT positions. There is no maximum or minimum SCORE value.
The SCORE is a mathematical way to quantify a historical reward to risk ratio. Since it is a ratio then interpretation can differ depending on the magnitudes of and variation inside the numerator and the denominator. For example, a stock with low median % gains and extremely low variation in those gains will likely have a relatively high SCORE. However, a stock with the same low variation in % gains but higher % gains will have a higher SCORE than the previous example. Yet another stock with higher variation in the % gains but magnitudes in the % gains greater than either of the previous examples may have a lower SCORE than both of the prior examples because of the penalty for high variation in the percent gains. Caution should be used when interpreting the SCORE values.
For example,
A higher positive SCORE value appears for a stock with the following historical 1st day percent gains (+5%, +4%, +7%, +8%, +3%) than another stock with the following historical 1st day % gains (-12%, +10%, +5%, +1%, +2%). The candlestick SCORE for the first example is 3250 and the second example is 84.
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Example Score Calculations
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The following example explains how to calculate the Day 1 SCORE and Overall Day 1 through Day 5 SCORE for a specific stock & candlestick pattern combination. The following example is a screen of the HotCandlestick.com SCORE database using the following criteria...
(1) Candle Strength is Positive
(2) Candle Pattern Count = 5
Many other criteria are available to specify. Included in this database (1 of 3) are candlestick pattern, ticker symbol, candle strength, candle pattern count, median % changes for days 1-5, scores for days 1-5, overall 1-5 day score and many sorting options.
First, it is important to understand how the daily percent changes are calculated.
Day 1 values are based on the open and close prices the day after the pattern was identified.
Day 5 values are based on the open price the day after the pattern was identified and the close price 4 days later.
The formulae used to calculate Day 1 and Day 5 % Changes:
Day 1 % Change =
[(Close[Day 1] - Open[Day 1]) / (Open[Day 1])] * 100%
Day 5 % Change =
[(Close[Day 5] - Open[Day 1]) / (Open[Day 1])] * 100%
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