What Is The Best Time Frame For Candlesticks?

Candlesticks are popular. They are very useful for visual displays, but our previous backtests indicate candlesticks might be useful to make trading strategies as well. In this article, we look at what is the best time frame for candlesticks:

The best time frame for candlesticks is daily bars and relatively short holding periods from 1 to ten days. Thus, candlesticks are most useful for short-term trading. We backtested different time frames from 15-minute bars to monthly bars.

Key takeaways

• We explore the effectiveness of candlestick patterns across various time frames, aiming to identify which is most conducive to profitable trading.
• Through backtesting, the study concludes that daily time frames are optimal for candlestick pattern analysis, particularly with holding periods ranging from 1 to 10 days. This time frame offers a balance between capturing significant market movements and filtering out short-term noise.
• Key findings include:
• Daily Time Frames: Backtests on daily bars demonstrated robust performance, with a high win ratio and profit factor, suggesting that daily candlestick patterns are reliable indicators for short-term trading. ​
• Weekly and Monthly Time Frames: Longer time frames, such as weekly and monthly bars, showed less favorable results. The reduced number of trading signals and potential for significant drawdowns make them less effective for traders relying on candlestick patterns.
• Intraday Time Frames: Shorter intervals, like 15-minute bars, were found to be inefficient due to increased market noise and randomness. While they generated numerous trades, the profitability was compromised, and the strategies began to resemble buy-and-hold approaches due to prolonged market exposure.
• Additionally, the research indicates that candlestick patterns are most effective in the stock market, particularly the U.S. stock market, and less so in other assets like forex, commodities, or even Japanese stocks, despite the origin of candlestick charting in Japan.

Candlestick research (facts and statistics – backtested)

Before we continue looking into finding out the best time frame for candlestick patterns, we’d like to take the opportunity to remind you about the very thorough research we have done on candlesticks and returns.

We quantified all the candlestick patterns we could find (75 patterns) and put them all into trading rules that are 100% testable. Thus, you can know with certainty which patterns are working and which ones don’t work. These are facts and statistics, not anecdotal and random info.

We backtested the patterns on S&P 500, but you can (of course) test on other assets. You can order or read more by clicking on the banner below:

What is the best time frame for candlesticks?

Most blogs and articles argue that candlestick patterns work well in all time frames. Is that really true? We don’t think so. Let’s do some backtests to find out what is working and what is not working.

In a previous article, we backtested 3 candlestick patterns that work. The patterns were tested one by one, but let’s test all 3 in one backtest (not 3 separate backtests). We recommend reading that article to understand the background of this article better.

The candlestick patterns in question are:

• Bearish Engulfing Pattern (yes, it says bearish, but it is more bullish than bearish); and
• Three Outside Down Pattern; and
• Bullish Harami

Why did we pick these candlestick patterns? We picked these patterns based on the article named Do Candlesticks Work? In that article, we tested 23 different candlestick patterns and the 3 above were among those that returned the best results.

In this article, we test the above three candlestick patterns on SPY, the ETF contract that tracks the S&P 500. We enter a trade when one of the above three patterns gets a signal, and we exit the trade when today’s close is above yesterday’s high. Commissions and slippage are not included.

Candlestick patterns using a daily time frame

The first test is done on daily bars. The three candlestick patterns above return the following equity curve on the ETF that tracks the S&P 500: SPY. The test period is from its inception until today (tested with 100% margin):

There have been 474 trades. The average gain per trade is 0.43%, the win ratio is 73%, the profit factor is 2.1, the annual return (CAGR) is 6.2%, and the time spent in the market is only 20%. The max drawdown is 25%. These numbers are pretty good for such “simple” trading rules.

Candlestick patterns using a weekly time frame

Let’s switch to weekly bars and see what happens (with the same criteria as used on daily bars):

As expected, there are fewer trades:

There have been 105 trades. The average gain per trade is 0.7%, the win ratio is 73%, the profit factor is 1.5, the annual return (CAGR) is 2.1%, and the time spent in the market is only 24%.

This is a pretty devastating equity curve, and even after 20 years, we have barely recovered from the dot-com bubble.

Thus, we conclude that candlestick patterns work much better on daily bars than on weekly bars.

Candlestick patterns using a monthly time frame

This is the equity chart on monthly bars from 1993:

As expected, there are very few trades. Additionally, it performs much worse than on daily bars: the average gain per trade is 3.1%, and the CAGR is 2.5%.

Candlestick patterns using an intraday time frame

Do candlestick patterns work on intraday bars? This time, we backtest the ES futures contract using intraday data.

First, we test using hourly bars. The candlestick patterns are the same, but we change the exit criteria: the last three bars must close higher than the previous high.

We get the following equity chart from 2011 and onwards:

There are plenty of trades: 338. The average gain is a respectable 0.32%, and the CAGR is 10.5%.

Unfortunately, you spend 85% of the time in the market and thus this is closer to a buy and hold strategy than all the other previous time frames we tested.

If we switch to an even shorter time frame, 15 minutes, the results improve but then we risk giving away a lot of the profits to commissions and slippage:

The 967 trades generate 14.2% annual returns, but the time spent in the market increases to 89%.

Do candlestick patterns work on all financial assets?

This article has only focused on the S&P 500. This is not a coincidence. The stock market has a tailwind in the form of monetary inflation, productivity gains, and rising profits. Most other assets don’t have this tailwind, except for gold. For example, forex is a relative valuation between two currencies and is not a productive asset (like stocks).

We tested candlesticks on many assets like oil, gold, silver, Swiss Franc, Yen, bonds, etc. but candlesticks work best, by far, in the stock market.

Perhaps quite ironically, candlesticks don’t seem to work very well on Japanese stocks (ironic because candlestick charting originated in Japan). The US stock market seems to be the best market for using candlestick patterns.

Recommended reading about candlesticks

We remind you that we have many other articles about candlesticks. For example, we have covered the question how many candlestick patterns are there? and we have also covered all 70 types of candlestick patterns.

Conclusion: What is the best time frame for candlesticks?

We tested many different time frames in this article to determine the best time frame for candlesticks.

Both long and short time frames didn’t produce any good equity curves. Long time frames might work but our backtests indicate large drawdowns.

Opposite, short intraday time frames are not very efficient either. For example, 15-minute bars involve noise and randomness and you need to employ wider exits to make them profitable, but then you are getting closer and closer to a buy and hold strategy.

So, what is the best time frame for candlesticks?

Based on the backtests we did we can safely conclude that candlesticks work best on a time frame of daily bars. The best holding period is from 1-10 days.

FAQ:

Why is the daily time frame considered the best for candlestick patterns?

Candlesticks are visual representations of price movements in financial markets. Daily time frames offer a balanced perspective, capturing short-term fluctuations while providing a broader view of market trends. This allows traders to identify and act on potential opportunities within a reasonable time frame.

What were the key findings from testing candlestick patterns on different time frames?

The research indicated that candlestick patterns work more effectively on daily bars compared to weekly, monthly, or intraday time frames. While shorter time frames showed potential, they often came with increased risks and reduced efficiency.

How do candlestick patterns perform in intraday trading, and what are the trade-offs?

Intraday trading with candlestick patterns, especially on shorter time frames like 15 minutes, showed potential for profitability. However, it also increased the time spent in the market, resembling a buy and hold strategy, and posed challenges related to noise and randomness.