THE JOY OF CANDLESTICK TRADING - a Learning Experience

[tymen1]

To 8pipike and that trade!

To answer this question properly I will introduce a full chart of the trade. Notes below the chart >>>


By tymen1 at 2008-04-07

I think I have the right "pattern" here 8pipike. There are some big problems with this trade and I will go thro them.

1) I have re posted the chart because your chart is very small and it is extremely difficult to see anything!
Magnification is essential when dealing with candlesticks - I am glad you put a green marker line on your chart, otherwise I would not have seen anything.

You do not need to have 100 candlesticks showing before your pattern! 3 or 4 is plenty. What use is knowing what happened 12 hours ago??!!

2) The MACD is not necessary on your main charts - only on a 5 minute if you use it. So delete the MACD off your main chart and get more room.


3) Unfortunately, your "pattern" is nothing - not even a morning star (not evening star - check the difference).
The long shadow of the centre candle simply nullifies it and hence the entire pattern - it is a matter of psychology. The long shadows make this a dangerous trade to enter.

4) This non pattern is not located on the Bolinger bands (upper/lower) as Max99 and Vulcan Classic pointed out.

5) The morning star is not as reliable as the evening star. It should be traded as the morning doji star. Do you know what pattern that is?
I do not trade morning star patterns as such. There appears to be much greater probability in engulfing and dark cloud patterns.

6) I do not believe that the fundamentals would affect the trade if the candlestick pattern was a valid one. The patterns work regardless of the news releases - in fact the news releases often give the pattern its power.

7) Your 5 min chart lacks magnification and the Keltner bands are invisible.

See if you can do better next trade !!
Be vigilant and pick only quality patterns. Avoid getting desperate and going for just any pattern.

Finally, my chart is very much the same as yours and that with different brokers. So much for all the claims about price manipulation and running stops.

[tymen1]

Answer to question posted by Tyrant Ragg :

Your question is the wrong way around.

Suppose the resultant is going down telling us that the best short entry is on the lower KC band. Suppose also that the immediate price is higher than the lower KC band.

Then obviously, you would enter immediately and gain those extra pips.Remember, the KC indicator is a probability channel and, therefore, serves only as a guide. Take those extra pips as a bonus!!

Using the KC, you always go for the best price entry you can get. The KC helps you to get that best entry but sometimes straight visual examination does better!

You are, after all, playing around with an indicator with all the lag limitations!

[tymen1]

To Babysteps :

Sorry, I cannot open your files - they will have to be in a different format - or better, in attached images form.

[tymen1]

Answer to Tyrant Ragg's 2nd question :

Yes, this would be a valid short entry straight after completion of the red (3rd) candle of the evening star.

The best entry possible would be obtained.

It is a pity that the price is now headed for the stop loss which would be located 2/3 pips above the "star" candle.

But if you sense that this trade is going totally against you then it is possible to cut your losses by getting out early.
On the other hand, the price has not yet hit the stop loss. I have seen trades come within 1 pip of the stop loss then roar into profit! You could wait for this.

If the trade does indeed fail, do not dispair. Often a 2nd evening star comes along, or other candlestick pattern such as dark cloud and then the price roars in your favour - so much so that it more than cancels out the loss made from this pattern.



Late note on this question

I have examined this trade on my own charts. The evening star is not on the Bolinger bands but rather somewhat down from it.

Looking at it carefully, I would not trade this pattern. Being short of the upper BB it has too much upward potential and that is starting to show.

[8pipike]

Hi Tymen,

Thank you for your answer, I appreciate all the details.

I'm sorry for my English. Despite the great effort, what I put in while I write, I do make mistakes, this is not my native language -not an excuse, just a statement.

Have a great day!

[tymen1]

And now another chart related to 8pipike's first chart.

His chart was a 30 minute of EUR/USD. The one below is a the same one, only it is 20 minutes.

Notes below the chart >>>


By tymen1 at 2008-04-07

This chart shows the trade that should have been picked (on a 20 min chart).

An evening star is shown and the short entry at 30 pips is accomplished on the next green candle. As you can see, it makes for a nice short trade.

But how did we get that 30 pip entry that puts us in the middle of that green candle??

See the 5 minute chart in the next post.

[tymen1]

Here is the 5 minute chart :

Notes below the chart >>>


By tymen1 at 2008-04-07

The time of short entry is 19.40 and shown on both charts with a black vertical line.

At this point the BB is going up with the MACD level. Therefore, slicing the angle in half, the resultant (price) is going slightly up.

The best entry we can expect, therefore, between the middle and upper KC bands.

That is where the price is now so we go short immediately.

Now you can see that the price actually improved a little 3 candles on, and we could have entered better. But then, we do not know that and we could also have done worse.

So our entry is considered good and we wait for the MACD to tumble down and go level and collect our profit!

Remember : Look for quality patterns. Do not rush in and pick any pattern. Be discerning.



Next post - THE EXACT REASON WHY CANDLESTICKS WORK SO WELL. PROBABLY THE MOST IMPORTANT POST ON THIS WHOLE THREAD. IF YOU UNDERSTAND THIS, YOU WILL UNDERSTAND AND MASTER CANDLESTICKS.

DO NOT MISS THE NEXT POST !!

[VulcanClassic]

Originally Posted by 8pipike

Hi Tymen,

Thank you for your answer, I appreciate all the details.

I'm sorry for my English. Despite the great effort, what I put in while I write, I do make mistakes, this is not my native language -not an excuse, just a statement.

Have a great day!

Your english is fine, I think he was talking about lovelyforex.

[Max99]

Originally Posted by tymen1

6) I do not believe that the fundamentals would affect the trade if the candlestick pattern was a valid one. The patterns work regardless of the news releases - in fact the news releases often give the pattern its power.

[/b]

Tymen,

Maybe I’m missing it but from the chart 8pipike posted it looks like he’s pointing to the candle at point A on the chart I posted.

That’s not a valid signal and I wouldn’t have traded that close to the news release just two bars later. That would have been quickly stopped out. Have you had success entering a trade before major news releases?

[Max99]

Originally Posted by tymen1

To Babysteps :

Sorry, I cannot open your files - they will have to be in a different format - or better, in attached images form.

These files are indicators for MetaTrader. For those who use it just copy the files into your indicators folder, the restart MetaTrader and add the custom indicators to your charts. I see some potential with them but hopefully Babysteps can gives us more details. I’m not sure about the candlesticks indicator and the pattern recognition shows candle patterns, but way too many.