THE JOY OF CANDLESTICK TRADING - a Learning Experience

[tymen1]

This chart shows the final outcome. >>>


By tymen1 at 2008-04-22

Horay, the price went down by some 60 pips!! (pink arrow)

But, oh, woe! The orange arrow shows the price action going above our stop loss! (set 3 pips above the top of the star body)
In this trade we will have to revert to our original stop loss position (3 pips above the star wick) to make a profit.

But does this protect us?

Given that............

1) We place our stop loss 3 pips above the star wick. (diagrams following next post)
2)We use the 5 min KC entry method to get the best short entry with half of our allocated lots.
3) We add the final lots to our position upon the maximum retrace/pullback so that the computer averages our position to get an even better short entry.

..............we have an excellent risk/reward ratio.

A risk of some 30/35 pips from averaged best short entry to stop loss.
A reward of some 60 pips from averaged best short entry to exit.

But what about our win/lose ratio?

Next chart !

[tymen1]

Below is a 40 minute chart of a similar situation but different currency pair >>>


By tymen1 at 2008-04-18

There are two evening stars here.

The price has been rising rapidly, walking the upper BB. The yellow evening star knocks it for a sixer and sends it staggering sideways.

With the highest stop loss and careful entry using the KC method with an added to position short entry, you can manage a profit on this candle pattern.

The maximum profit is about 20 pips and the stop loss distance is also about 20 pips giving a 1:1 risk/reward.

But it must be done quickly because down the track the price shoots straight tho our stop loss.

The blue evening star is much better. It takes the staggering price action and gives it the final knock down to the floor!
A stop loss here can be safely set at 50% of the length of the 3rd candle of the pattern.
Thus we get a stop loss of about 15 and a reward of about 50.

Much better!

So what is the difference?

The next post will give final answers. (I have not forgotten Bernbeach and long term charts)

Tomorrow !!!

[concept]

So just to clarify that a evening star pattern can have a long upper wick as well? I am kinda confused of identifying. My image of that pattern is skewed. On the one pattern the upper wick is real long and the lower wick is short. In a few posts back it said that to get a 'confirmation' of a evening star pattern the lower wick needs to go close or past half of the first candle in the pattern. If it has a long upper wick and you can eyeball it, does the same apply?

I think I am getting a hang of these things... now if I can just get used to GFT... some of the stuff of it is kinda hard to figure out... like zooming OUT. I can zoom in no problem... lol

So much information to learn... candle sticks have my undivided attention!

[tymen1]

Originally Posted by concept

So just to clarify that a evening star pattern can have a long upper wick as well? I am kinda confused of identifying. My image of that pattern is skewed. On the one pattern the upper wick is real long and the lower wick is short. In a few posts back it said that to get a 'confirmation' of a evening star pattern the lower wick needs to go close or past half of the first candle in the pattern. If it has a long upper wick and you can eyeball it, does the same apply?

So much information to learn... candle sticks have my undivided attention!

OK, lets get this right. Refer to the 2nd candle ie the "star" candle.

The upper wick can be as long or short as you want - even no wick!

The lower wick of this 2nd candle should, ideally, not go past the halfway point of the 1st candle of the pattern.

Now, this is a perfect situation. In reality great variations occur.

Refer again to this hyperlink to get that "skewed" image corrected once and for all.

Japanese Candlestick Charting Explained

Yes, there is much to learn - but it will pay you big dividends if you can live with it!!

Good trading to you!

[tymen1]

The following diagram shows what has been happening in the last few charts I have posted. Notes below the chart >>>


By tymen1 at 2008-04-22

In this diagram an extreme rising upper Bolinger band is shown in blue. The price action walks the band, is shown in pink. An evening star appears.

This is surely the most extreme case you will ever encounter in trading an evening star. The upper and lower Bolinger bands together look like the open end of a trumpet.
The price is going long extremely strongly and we are expecting the evening star to turn this around promptly into a short trade.

No way!

From extreme optimism to sudden extreme pessimism. I don't think so!

In this totally extreme case the evening star knocks the price sideways for a time. But then 3 tracks become possible. They are shown.

Only one of these three will safely go on to produce a good profit - the other two going long past the stop loss.

There is then, the possibility of sniper trading while the price action is still level. However, this is very risky - we do not know when the price action will change track, and which track it will follow.

So if we forget about the sniper trade, are we effectively gambling to go onto this trade to get that good profit?
Do you like casinos?

1 chance in 3? Although the green track may be the least likely of them. Still, you have to contend with the possibility of the orange track.

The best chance here is to wait until another evening star or similar short producing pattern appears. This was shown in the previous chart labelled "price drops immediately".

Note here 2 things :

1) The blue highlighted pattern was superior to the yellow highlighted one. The 3rd red candle was much longer in this pattern and went past the 1st green one. Not so in the yellow highlighted pattern.
The 2nd evening star, is, therfore, a superior evening star pattern.

2) The Bolinger band in the blue highlighted pattern is level. This is VERY IMPORTANT!. You look at the Bolinger band at the close of the 3rd candle to discern this correctly.
Clearly the 1st pattern BB is at an extreme extension (together with the lower BB it looks like the opening end of a trumpet).
The 2nd pattern BB is much more sedate and, indicates that a short trade has a great probability of success here.

Next post >

[tymen1]

We are now in a position to make some conclusions :

Using the above extreme case as a parameter, we are able to develop some guide lines for setting our risk/reward ratio.

We must get better trades. What is a better trade?

In better trades :

1) We allow the trade to run its full length to get maximum pips.

2) We set the stop loss as short as possible.

Now looking at the extreme case above...........

1) We look for quality evening star candle patterns - ones where the 3rd red candle is as long as possible.
2) We examine the BB to see what the spread of both the upper and lower are like.


In extreme cases, we can dare a sniper trade but risk the health of our stop loss. The stop loss in this case should be place about 3 pips above the star wick.

In these extreme cases, it is better to await another candlestick pattern.
If not, then avoiding this trade is a safe move.

If the BB is level after the 3rd candle, and we have a quality pattern, then the stop loss could be set at the halfway mark of the 3rd candle. This would make a great improvement in the stop loss distance.
The price action here is likely to go straight down or, at worst retrace only slightly.
Good profit potential exists.


In between senarios can have a stop loss set at the top of the body of the 3rd red candle.
Such senarios are cases where the pattern is not the best but the BB is relatively level or even going down.


In all cases, the staged entry is used to get the maximum best short entry.

I hope all this helps.

I invite all comments and suggestions.

[KENNETH LEE]

Tymen ; Most enlightening , I see why you have been sucessfull with this srategy.. I can only hope my mind can absorb enough of this great information.

[tymen1]

3 suggested stop loss positions are given below >>>


By tymen1 at 2008-04-24

1) The high risk position is 3 pips above the wick of the star candle.

2) The medium risk position is 1/2 pips above the 3rd candle body as shown.

3) The low risk position is 1/2 pips above the mid point of the 3rd candle.

[VulcanClassic]

Hi Tymen,

I think you just answered one of my questions I haven't asked yet; when to choose which stop - depending on quality of pattern.

I guess it takes experience to discern which patterns are quality and which aren't (I would have taken the yellow pattern, seeing how I don't know that the blue pattern is coming). That BB tip should help though.

Could you elaborate a little futher on the Macd action you mentioned?

Would you target 10 pips no matter the timeframe?

Have a good one.

[tymen1]

Originally Posted by VulcanClassic

Hi Tymen,

Could you elaborate a little futher on the Macd action you mentioned?

Would you target 10 pips no matter the timeframe?

Have a good one.

I would not worry too much about that MACD on that "trumpet" chart. It is of no help to us at all really. Remember, it is lagging. But I put it on to show that the price was temporarily at a level point.

I take it this is the MACD you are talking about.

The second question was answered with my statement previously :

In better trades :

1) We allow the trade to run its full length to get maximum pips.

The next post should be of particular interest to you.