THE JOY OF CANDLESTICK TRADING - a Learning Experience

[tymen1]

Here I am going to give an example of keeping your stop loss low and letting your trade run.

This has been an evolution process so far. We are trying to develop an excellent procedure for trading. Improvements will come as we go on.

In the following chart >>>


By tymen1 at 2008-04-23

A nice evening star has been spotted with the BB essentially flat on both the upper and the lower. Good prospects!!

So we plan a stop loss at the top of the red candle body (medium risk).(947)

A short entry of half our lots is made at 931 shown by the black vertical line.
The rest is added at 943 - averaging 937 which becomes our final short entry.

We let the trade run, overcoming a hurdle (pullback) shown by the green candle. The outcome is an exit at 891.
We stay in the trade until a profit or a hit of the stoploss - whichever comes first.
But at 891 we have run a very good profit and for safety (don't get greedy) we exit.

The difference......937-891=46 pips..........a really good profit.
The stop loss distance is 947-937=10 pips.

Thus we have a risk/reward ratio of about 1:4
Do you like that?

The win/lose ratio is very high - considering that the BB is favourable thus allowing us to lower the stop loss to medium position.

This is a good trade. Lets look at the 5 min KC chart.

[tymen1]

The 5 minute KC chart >>>


By tymen1 at 2008-04-23

The chart shows a DiNapoli preferred MACD in the bottom half of the chart. The values for this are close to 9, 5, 17. But it does not make much difference which MACD you use.

I am working on evolving this entry method to eliminating the MACD. As you try to guage entry, it moves too much and you really do not know when to click the mouse!!

The BB and MACD vectors are shown at the entry line on the chart. The Keltner is shaded grey with the mid band in yellow.

A yellow highlighted oval shows the BB and MACD vectors together with the resultant which is going down slightly.
This means best entry somewhere below the yellow KC mid band and we snatch the entry at 931 - which was effectively at market when the 4th candle of the evening star opened.

The short entry was snatched with half the allocated lots.

A short ride down with 3 red candles, then a pullback. We add the remaining lots when the price goes thro the upper Keltner band. The price may well go higher but this is a good place to add because it is an extreme.

So we added at 943. The computer now averages our short entry to 937. This is 10 pips lower than our stop loss at 947.

To cater for our stop loss distance we must set a target profit of at least 10 pips, but preferably greater.



We let the trade drag on. As long as the stop loss is not hit, the trade is active and we watch as the profit pip count grows.

Resetting the stop loss to a lower point to lock in profits is not a good idea. There is a pullback coming within 2 pips of our stop loss. So lowering our stop loss would have seen us make a small profit of much fewer pips.

The risk is, of course, that the pullback will go thro our stop loss and destroy our profits with a loss.
But we did assess the trade beforehand and placed our stoploss intelligently!!


So we weather this one pullback, but not another since the price now roars down to 891. This is very satisfying and we exit while we can.

* * *


Tomorrow, I will not post.

In Australia it is ANZAC DAY - a war memorial day.
Although I am a Dutch citizen, I live in Australia and I will respect Australians with their ceremony.

[yuv]

great posts tymen. i have been waiting impatiently for post updates and i must say its well worth the wait. keep up the goood work. u r a great teacher. feels like i m learning from the best.
every update makes the system better and better. and now with the stop loss and risk/reward explained and sorted i dont think i will look anywhere else.

massssssssssive thanks tymen
good luck trading

[Kraven]

Tymen, your efforts here have drastically improved my trading--keep up the amazing work!

The more you post and explain, the more pips I get each day

As a side note: I have recently switched to using GFT, and I gotta recommend it to you guys! Great platform; I thought I'd never like anything better than MT4

[bernbeach]

Hi Tymen...

[zess]

Originally Posted by tymen1

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!

thanks tymen1 for the useful links that you've posted here...i've been looking for candlestick behaviour for long time...finally i found very useful tips from you...fyi...i'm currently improvising the technique that one of the member in this forum...basically he focusing on candlestick together with Stochastics indi..

[tymen1]

Thanks for the very kind compliments from Yuv, Kraven and Zess.

Now Bernbeach has asked me to like at longer term time frames and there are probably others who would like this too.

I will now turn to daily and 4 hour time frames but commit to my ongoing search to properly set up the risk/reward ratio.

In longer time frames such as the daily, we only have one choice of time frame - the daily.
As such, the number of charts is much more limited. You cannot just open a daily and instantly find an evening star or other candlestick pattern. You may have to wait several days for a pattern to appear.

Because of this candlestick charting on these time frames takes a different course. Trading is wanted immediately and therefore a whole chart is looked at going back 2 weeks or more.
As well as the candlesticks, trend lines are drawn. Support and resistance lines are added (both level and sloping) to discern where to place the stop loss and take profit orders.
In addition, a drop of Fibonacci may be added.

I will however, stick to the standard patterns for now. The advantage here is their certainty.

[KENNETH LEE]

Tymen; Thanks for all the great Ideas and Information. I know you have spent a lot of time on all your post and it shows. Just wanted you to know we are here and listening.


Ken

[tymen1]

Thanks KENNETH LEE.

To start this work, first we must look and carefully read the hyperlink below.

It is essential that it be read and carefully understood. What I am going to post relates directly to this hyperlink and nothing I say after here will make sense unless the hyperlink is read.

Here it is :

Using Multiple Lot Positions To Improve Trading FX

[tymen1]

I am now going to consider what has been said in the hyperlink.

I have already discussed the halving of allocated trades and adding to them upon a retrace/pullback.

To trade 2 lots is effectively the same thing.

Note that in the given short trade on the hyperlink, the price action continued to go down and did not retrace thro the initial starting point, ie the open of the 4th candle.

We, however, regularly experience price pullbacks right thro the opening and even come close to our stop loss!!

Therefore, the idea of shifting the stop loss to the entry/opening is not a good idea. The 2nd lot will not only return to zero profit but it will go into the negative thus taking away from the initial first lot profit. If the price returned only to the entry we would make a profit only on the first lot. But going thro the entry reduces our 1st lot profit to almost nothing.

But in nearly every case the price retraces thro the short entry and goes long when we want it to go short.

We are, therefore, better off leaving the stop loss where it is and not moving it.

There are then 3 separate senarios which are looked at in the next post.