Key results
- Total return
- +60.1%
- Buy & hold: +217.9%
- Annual return (CAGR)
- +4.8%
- Buy & hold: +12.3%
- Max drawdown
- -14.8%
- Buy & hold: -28.5%
- Win rate
- 44.23%
- Profit factor
- 1.51
- Trades
- 104
- Longest losing streak
- 6 trades
- Period
- Oct 2, 2016 to Oct 1, 2026
- 10 years
- Market
- XAU/USD
- 4-hour
Equity curve vs buy & hold
Returns year by year
| Year | Return | Trades |
|---|---|---|
| 2016 | -7.9% | 4 |
| 2017 | +7.4% | 11 |
| 2018 | -4.5% | 8 |
| 2019 | +3.7% | 4 |
| 2020 | +26% | 11 |
| 2021 | -6.8% | 10 |
| 2022 | +1.3% | 14 |
| 2023 | +10% | 9 |
| 2024 | +13.8% | 9 |
| 2025 | +8% | 9 |
| 2026 | +1.7% | 15 |
Calendar years, compounded from monthly results. The first and last years can be partial.
The engulfing candle is often the first reversal pattern a trader learns: one candle's body swallows the previous one, and the balance of power flips. On its own, the pattern fires constantly and much of the time means nothing. A common fix is to only take it when the market is already stretched to the downside. This test combines the two: a bullish engulfing candle, confirmed by an RSI that shows an oversold market.
The rules we tested
- Market: gold (XAU/USD), 4-hour candles.
- Period: 2 October 2016 to 1 October 2026, ten years.
- Entry: buy when a bullish engulfing candle prints on the 4-hour chart and the 14-period RSI on the same chart is below 40. Both conditions on the same bar.
- Exit: a fixed stop-loss 2% below entry and a fixed take-profit 4% above it.
- Direction: long only. No short trades.
- Costs: 0.02% commission per side, full position size on each trade.
What the backtest shows
The strategy returned +60% over ten years, about 4.8% a year, from 104 trades. Holding gold returned +218%, about 12.3% a year. On raw return, buy and hold wins clearly.
The interesting number is the drawdown. The strategy's worst peak-to-trough loss was about 15%, roughly half the 28% gold suffered over the same window. Its Sharpe ratio was 0.64.
About 44% of trades won. The average win was about 3.9% and the average loss about 2.0%, which gives a profit factor of 1.51: the strategy made about 1.5 dollars for every dollar it lost. Of the 104 trades, 58 hit the stop and 45 hit the target. The longest losing streak was six trades.
2020 was the best year at +26%, with 8 winners out of 11 trades. The weakest stretch was the first three months of the test (late 2016), at -8% with four trades and four losses. 2021 was the worst full year at -7%, and 2018 also lost money. Every year from 2022 onward finished positive.
Compare it with the raw pattern
Our morning star test on the same market, period, stop and target used no filter. It made less (+48%) with twice the drawdown (about 32%). The RSI condition did not create the edge, but it removed a lot of bad trades.
Why it works, and where it falls short
The logic is sound: an engulfing candle after a real pullback is a buyer stepping in at a discount, not just one green bar in a choppy range. The RSI filter throws away most of the noise, which is why only 104 trades passed in ten years, about ten a year.
That selectivity is also the limit. Gold spent much of the decade trending up with few deep pullbacks, so the strategy was flat most of the time while the price climbed. A long-only setup that waits for oversold conditions will trail buy and hold in a bull market by design; what it offers instead is a much smoother ride.
What you could test next
- Loosen the RSI threshold to 45 or 50 to get more trades, and check whether the drawdown stays low.
- Widen the target. Our stochastic test on gold uses a 7% target against a 2% stop and returned more.
- Add the mirror short rule (bearish engulfing with RSI above 60) to see if the edge works both ways.
- Run it on the daily chart, or on another trending market such as the Nasdaq 100.
Methodology and assumptions
- Starting capital
- 10,000
- Position size
- 100% of equity
- Commission
- 0.02% per side
- Data window
- Oct 2, 2016 to Oct 1, 2026
- Run date
- October 2, 2026
- No repainting: every signal is computed on closed candles only, so the backtest never acts on a price a trader could not have seen yet.
- Past performance does not predict future results. A backtest is a historical simulation, not a forecast.
Frequently asked questions
What is a bullish engulfing candle?
A two-candle reversal pattern: a bearish candle followed by a bullish candle whose body fully covers the previous body. It shows buyers overpowering the sellers of the prior bar.
Why combine the engulfing candle with RSI?
The RSI below 40 condition keeps only the engulfing candles that appear after a real pullback. In this test, the filtered version on gold had a drawdown of about 15%, against about 32% for the unfiltered morning star pattern on the same market and period.
What win rate does the engulfing candle strategy have?
About 44% over 104 trades on 4-hour gold. With a 4% target against a 2% stop, the profit factor came out at 1.51.
Does the bullish engulfing strategy beat buy and hold on gold?
No. It returned +60% in ten years against +218% for holding gold. It is long only and sits in cash most of the time, which costs a lot in a strong bull market.
Reproduce it, then change it
Every number on this page comes from the Backtrex engine. Rebuild the strategy in the app, then change the market, the timeframe or a parameter and see whether the result holds.
Ready to backtest your strategies?
Create your free account and take the guided tour: a real 10-year backtest in 3 minutes, no coding, no credit card.
Create your account in 30 seconds and run your first backtest. No credit card.
Other backtests
- Strategy
- +118.7%
- Buy & hold
- +217.8%
- Strategy
- +47.7%
- Buy & hold
- +217.9%
- Strategy
- +104.5%
- Buy & hold
- +217.9%
- Strategy
- +26.9%
- Buy & hold
- +528.3%