Guide · Candles & chart patterns
Does Engulfing Switch work?
Across 375 stocks, Engulfing Switch cut the worst fall on 87%, beat buying and holding on risk-adjusted return on 12% and on raw return on 11%. Mainly a seatbelt: it softened the big falls on most stocks, but usually gave up return to do it.
What it predicts
Buy after a bullish engulfing candle ends a decline; sell after a bearish engulfing candle ends a rally. An engulfing candle's body swallows the whole body of the day before.
- Bullish engulfing: after a decline, a down day (close below open) is followed by an up day that opens at or below the prior close and closes at or above the prior open.
- Bearish engulfing: after a rise, an up day is followed by a down day that opens at or above the prior close and closes at or below the prior open.
- In at the close of a bullish engulfing day. Out at the close of a bearish engulfing day. Otherwise the rule keeps its last call.
Candles & chart patterns plays bet that a short pattern of bars can show a move running out of steam. The family guide
How to use it
- It sits in cash much of the time (holding on about 44% of days), so judge it on risk-adjusted return rather than on matching a rising market.
- It worked best on Sectors (33% beat holding on risk-adjusted return) and worst on Metals & mining (0%).
- Use it as one input. Your signal combines the plays you count with the other factors you weight into one call.
When it worked
Engulfing Switch did best against holding in the 2008 crash (+13% median gap) and worst in the 2020–21 rally (−28%). Median gap in return against holding the same stock (per year over stretches longer than 18 months; crypto excluded).
| 2008 crash | Recovery 2009–19 | COVID drop | 2020–21 rally | 2022 bear | Since Oct 2022 | |
|---|---|---|---|---|---|---|
| Engulfing Switch | +13% | −9% | +10% | −28% | +5% | −7% |
Where it worked
By kind of stock: how often it beat holding on risk-adjusted return, and the median Sharpe ratio gap.
| Group | Beat holding, risk-adjusted | Sharpe gap |
|---|---|---|
| Sectors | 33% | -0.18 |
| Micro caps | 33% | -0.17 |
| Industrials & rentals | 22% | -0.16 |
| Industrials & materials | 20% | -0.19 |
| Real estate | 16% | -0.21 |
| Financials | 15% | -0.24 |
| Consumer & retail | 15% | -0.18 |
| Energy & power | 14% | -0.21 |
| Software & devices | 12% | -0.23 |
| Indexes & ETFs | 0% | -0.25 |
| Big tech | 0% | -0.53 |
| Semiconductors | 0% | -0.24 |
| Media & telecom | 0% | -0.25 |
| Healthcare | 0% | -0.20 |
| Metals & mining | 0% | -0.21 |
Where it helped most
Sharpe ratio gap against holding, stocks with 3+ years of history
Right now
Engulfing Switch holds 169 of 377 names as of the Oct 13, 2026 close.
Changed its call in the last two weeks:
Backtest results since 2005 (or as long as each stock has traded), against holding the same stock over the same dates, after 0.05% per switch. Past results don't promise future ones. This analysis does not constitute trading advice. Please meet with an advisor or independently review sources before making any decision.