← All lessons

Forward returns

Measure what happened after each signal, the same way every time. · 6 min

ProOpen to everyone while Pro is in preview.

A forward return is what a signal would have earned over a fixed number of days after it. It is the raw material of every pattern test.

forward return(h) = close(day + h) ÷ open(day + 1) − 1

Entry is the next open, because the signal is only known at the close. The horizon h is chosen before looking at the results.

Predict first

After hammers in our market, which horizon do you expect to show the biggest average gain: 1, 5 or 20 days?

Forward returns

What happened after the signal, measured from the next open, at five horizons. Overlapping signals are skipped so no move counts twice.

Running the numbers…

Reading the table

  • Cases shrink as the horizon grows: a signal is skipped while an earlier one’s window is still open, and the last days have no future to measure.
  • Mean and median differ because a few large moves pull the mean. Returns have fat tails, so look at both.
  • Higher is the share of positive returns, the “win rate” of the pattern.
  • All days is the base rate: what a random entry earned. Lesson 3 is about why that column matters most.

Worked example

Hammer on day 131. Next open 112.88; close five days later 112.94.

112.94 ÷ 112.88 − 1 = +0.05%

Do this for all 49 hammers and average: +0.35% (median +0.28%).

Common mistake

Counting overlapping windows. Two hammers three days apart share most of their five-day windows. Counting both doubles the same move and makes the sample look bigger and surer than it is. The lab skips any signal inside an earlier one’s window. It also never uses the signal day’s own close-to-close move: that move is what made the pattern, so it cannot be its reward.

A signal fires at Monday’s close. You test a 3-day horizon. Which prices give the forward return?
The mean forward return is +0.8%, the median −0.1%. What does that tell you?

Closing round

Edge or noise?

A fresh market and a pattern, with or without a hidden edge planted after each signal. Read the study and call it.

Building a fresh case…

Further reading: Bulkowski, Encyclopedia of Candlestick Charts, “how to use this book”.