AlpacaScan: How Candlestick Patterns Reveal Trading Opportunities

Following the previous post where I explained the basics of the candlestick charts and shapes, I am going to walk through how you can discover trading opportunities by using candlestick patterns, specifically with AlpacaScan.

 

1.What is AlpacaScan?

AlpacaScan is service that we released last month, it picks up specific candlestick patterns and notifies you when a particular stock matches that pattern. You have the option to sign up for the daily email or you can simply check out our Twitter @capitalico; every day  5pm PT/ 8pm ET every day.

AlpacaScan screens through stocks and identifies which specific stocks match the below defined patterns.

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スクリーンショット 2016-06-17 10.36.09
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Testing results

Next we explore how useful candlestick patterns are. The below chart shows the results from backtesting Bullish Engulfing using AlpacaScan in the foreign exchange market. Each year having 10 to 13 occurrences of Bullish Engulfing, the percent likelihood of exiting with a profit after 1 week, 2 weeks or 4 weeks is indicated below.

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Here, we see that in 2013, buying in during a Bullish Engulfing and exiting at 4 weeks or less yields a high probability of a profitable exit. In 2015 however, the probability of exiting with a profit was lower. When it comes to making trades, there is no single pattern that can can indicate market trends with absolute reliability. When interpreting candlestick chart patterns, it is important to analyze them in the proper context including other indicators, trends and market prices.

 

2.How to use AlpacaScan

As a self-directed trader, you are the one who decides ‘what’ to trade and ‘when’ to trade.  AlpacaScan has two popular uses to help you make those decisions.

One option is to select stocks identified by AlpacaScan from over 7,000 U.S. stocks that follow a specific candlestick pattern.. While it would be impossible for an individual person to check every price change every day; this task is fully within the capabilities of modern computing. Using cutting-edge technology in AI and deep learning and applying it to proven market analytics provides traders the unique benefit of staying grounded to the fundamentals while executing strategies at unprecedented volumes and complexity.

A second option is to use AlpacaScan to fine tune your medium and long term investments. For medium and long term stocks, you can develop highly specific strategies based on historical pattern trends of your stocks. Adding a backtest feature to this app is currently in development, so keep an eye out for it’s release soon!

 

Process

Here is a real life example of how one of our members used AlpacaScan to make actual trades.

At first, he focused on Bullish Harami, a pattern which signifies a potential reversal of the downward trend. On May 17th, he analyzed the stocks following a Bullish Harami pattern, all of which were identified on AlpacaScan and communicated by email and Twitter.

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He chose RRC, because the bearish first candle (in red) was not too long compared to the bullish second candle (in green) which had no visible upper shadow; this means that the highest price that day was the same as the closing price. Based on this analysis, he felt confident that the price would continue to rise.

AlpacaScan identifies and filters stocks that trigger specific logical conditions, therefore it is the stock’s performance that determines whether AlpacaScan will include it.

Even if a stock pattern meets the logical conditions, some patterns are stronger than others. In the case of SDRL, although it met the qualifying conditions of a Bullish Harami, the length of bearish first candle and the bullish second candle were almost same and therefore less ideal than RRC. Similarly, CJES was less ideal because the bearish first candle was too short compared to the bullish second candle. And the bullish second candle of CNX was at the high point, which can indicate that all stocks might be sold.

AlpacaScan also arranges stocks in order of volume size. In this case, there were 69 stocks that met the Bullish Harami pattern so it is helpful to be able to check based on volume size which helped him reduce his focus down to the four highest volume stocks.

To confirm, and as a matter of good practice, he also checked long-term price changes from finviz.

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This chart shows the price changes of RRC since August 2015. With a simple glance, we can see that this stock has steadily risen since the beginning of 2016.

This stock pattern followed medium and long term flow and the reversal of the downward trend appeared, which confirmed that this was a good time to purchase this stock.

The below chart is the result of price changes.

finviz2

As he expected, the prices rose.

The purpose of AlpacaScan is to scan over 7,000 U.S. stocks and identify only the ones that meet the criteria for identifying possible trend reversals. Therefore, it is now possible to be able to evaluate every U.S. stock, every day and only focus on the patterns we like. But always remember, before making any trade decision, due diligence and additional research must be performed. It won’t be long before AI can replicate trade decision analysis and make the decision to trade stocks including one like this past example.

 

3. Summary

Candlestick pattern is one of the most famous chart analysis. It is useful for deciding when you trade stocks and there is a great deal of information on how to make the most out of this information.

But always remember that candlestick chart patterns are a source of information and not the recommendation. The proper way to use this information is to help you make a trade decision based on other indicators and sources of information, but as one of the most valuable sources of information, it is well worth the time to learn about candlestick chart patterns.

 

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