THE JOY OF CANDLESTICK TRADING - a Learning Experience

[tymen1]

Here we are at a series of posts concerning a EUR/USD evening star trade.

First considerations :

Look at the 20 minute chart below : Notes below the chart >>>


By tymen1 at 2008-04-10

The chart shows two evening star patterns highlighted in blue on the upper Bolinger band.

The first one is well tucked into the upper BB. The lead up is a series of green candles and the 3rd candle of the pattern is a nice long red candle with a minimal lower shadow (wick).

It is a quality pattern and, as such, produces a nice profit by going short, as can be seen in the red candles following the 3rd candle.

The first candle after the pattern is a green candle and, using the KC entry method, you would have entered short. You would not get the top but certainly you would get a good way up from the bottom. A good profit was certain.

But what about the next evening star ?

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[tymen1]

The 2nd evening star appeared to have a few problems with it. (20 minute chart).

The lead up to the pattern was good - better even than the first pattern.
But look further.............(previous post).

The only part of the candle on the upper BB is the wick of the "star". The rest of the star is below the BB. Logically the rest of the pattern is under the upper BB - not only that but well under the upper BB.

As such, there is room for the trade to move upwards (long) against you. So that is a note of caution!

To further reinforce the caution, the 3rd candle of the pattern (red) is very weak (short or small).
The lower wick is longer than the candle body telling us that a degree of retracement upwards has occurred. Therefore, double caution!

So we need to be careful with this trade. As I said earlier, I considered this to be a risky trade so I did it on my demo platform.

It helps to have an indefinite demo platform - you can do all sorts of things with it.

So now to the entry of this 2nd evening star pattern..................

[VulcanClassic]

Good day Tymen,

I'm reading with interest.
I was in the GBPUSD this morning which was a good pattern I think. Then the news hit and the spike took out my stop and went my way afer all. Good entry but I stayed in too long. But that's ok, I'm learning. I'm not using cash until consistently profitable.

I have a couple more questions:

Which platform are you using for demo? I'm on metatrader and don't have 20 min charts. Those patterns you just posted aren't on my charts. I can see where they were but the nice formation isn't on the 30 min chart. Like to be on the same page.

Also, is a reversal pattern such as doji or morning star still considered valid if it closes on the opposite side of the middle BB?

Looking forward to your next post.

Jeff

[tymen1]

Here it is - the 2nd evening star candle pattern - 20 minute chart :

Notes below the chart >>>


By tymen1 at 2008-04-10

The evening star pattern is highlighted in light blue. The short entry candle (the last candle on the chart - red) opened at 40.


I got the best entry at 42, the very top. Ah, rigged you say. Nope, just lots of practice!
The GFT computer generated entry line is, therefore, shown on both charts at 42.

Lets have a look at the 5 minute KC chart to see how we did it.


By tymen1 at 2008-04-10

The 3 Bolinger bands are shown in royal blue, the short entry with the big black arrow. The KC channel is shown in grey with the middle band in yellow. The MACD is underneath.

The MACD and middle BB vectors are shown in thick royal blue on their respective lines. A separate diagram is also drawn showing the pink resultant going slightly down.

The resultant then tells us that the best possible short entry would be between the middle and lower KC bands.

Now, as I went to enter at 40, the candle went very rapidly down, then very rapidly up - too quick to do anything. Then it stalled at 42 - above the middle KC band

Ah !! Fantastic!! Immediate entry short at 42, which was also the top of that candle !!

Staying calm when things are moving fast helps.


Lets keep going. Next post.

[tymen1]

Just a quick commercial to answer Vulcan Classic's post :

Originally Posted by VulcanClassic

Good day Tymen,

I'm reading with interest.
I was in the GBPUSD this morning which was a good pattern I think. Then the news hit and the spike took out my stop and went my way afer all. Good entry but I stayed in too long. But that's ok, I'm learning. I'm not using cash until consistently profitable.

Please note that your trade was the "cable" ie GBP/USD.
My trade was EUR/USD.

I have a couple more questions:

Which platform are you using for demo? I'm on metatrader and don't have 20 min charts. Those patterns you just posted aren't on my charts. I can see where they were but the nice formation isn't on the 30 min chart. Like to be on the same page.

You will have to work hard and get to program your MT4 to produce 20 and 25 minute charts - they are important and can show up small differences.

My own platform (live and demo) is the GFT platform but run thro a broker in Australia who allows the demo platform to be use indefinitely. I am probably guilty of link violation here to provide a hyperlink. If so you can send me a private message if interested.

Kinetic Securities

Also, is a reversal pattern such as doji or morning star still considered valid if it closes on the opposite side of the middle BB?

Sorry, I do not quite understand what you mean here?

A morning doji star is traded long from the lower BB ie into the centre. You exit by going as far as you dare or set a target profit.

[tymen1]

Now back to that trade - next 5 minute KC chart :

Look below >>>


By tymen1 at 2008-04-10

We decided to stay on the 5 minute chart (a good place to see all the action). All started to go well, but then..........

A green candle appeared and it was an engulfing green candle!!
OK, a 5 minute chart, a pattern here does not have much significance........or does it?
But the MACD is also starting to turn around !!!

Did we not say that the evening star was not properly on the upper BB but rather somewhat below it??
Does this not give room for the price to go up again - against us since we are going down (short) ?
Are we not now reaping the punishment for not choosing our patterns carefully ?

Sigh !.................We are going to lose this trade !

Next post.

* *

[tymen1]

In frustration we turn back to the main 20 minute chart but as we watch the news only gets worse.

20 minute chart >>>


By tymen1 at 2008-04-10

Wow ! We have really stuffed this one up !!

The price has now gone right up and way past our short entry point of 42 and we are in the negative well and truely.

The top of the star is 55.

This trade is going to go right past our stop loss and shut down our hopes with a nice loss........... Great work Bozo !!!!!!!!

But did we set our stop loss correctly??..............yes we did.

How?..........The stop loss is set 3 pips above the highest point in any pattern.
Or 3 pips lower in the case of patterns on the lower BB eg piercing patterns.

In this case it is set 3 pips above the star, which makes it at 58 pips.

But caution !

Do you know how your charting platform works?
You must take account of your spread, and different platforms do this differently.

On my GFT platform I can set a short (sell) stop loss exactly and my trade will exit right there.
For example, if I set a short (sell) stop loss at, say, 10 pips, the trade will close at exactly 10 pips.

On my GFT platform I have to set a long (buy) stop loss at one spread length higher to get a correct exit.

For example, suppose I trade EUR/USD - 3 pips spread.
I want to have a stop loss at 20, then I must set it at 23 pips.
Then if the price hits 20, it will close my trade.

So if I make a mistake and set the long stop loss at 20, it will close the trade at 17.

This is not what I wanted - and you could lose out on great profits by making this mistake.

So!.............find out how your program works with stop losses so you do not make silly stop loss mistakes.


Next post.

* *

[KENNETH LEE]

Tymen1 ; Again so many thanks for all your effort. I also trade with GFT and they allow you to run a demo as long as you like . When you have a live account. My demo is over a year old now. (Just for info). I will be setting this up on mine this weekend but probbablly place orders threw Oanda Tighter spreads .9 pip on EUR/USD.. 2.5 Cable. Again Many Thanks PS. printer enjoyed the workout.. Ken

[tymen1]

Well, we might as well die watching the 5 min KC chart. It is a quicker chart and we can perish quicker.

Here it is >>>


By tymen1 at 2008-04-10

Our entry is shown by the black vertical line and, yep, the price is well above our entry. (sigh).

These things happen - I knew I was just a loser!

Look at that MACD - going up like there is no tomorrow. Ahhrrrrgggg !

Oh.......how rightous and just is our punishment for choosing a pattern not quite on the BB. We must............................repent !!

Lets be cool.........Yeah!....cooooooooooooool. Repentance is cool.!

So we lose - there will be another trade.

Wait for the next exciting episode!!

A lot of posts here. You need time to read and digest them.
So next post will be tomorrow at earliest.

[Swamp Gas]

New guy here, thank you very much for this thread!

Im only on page 6 right now, but hopefully I'll have time to get through it this weekend.