THE JOY OF CANDLESTICK TRADING - a Learning Experience

[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.

[tymen1]

Examine the following diagram : Notes below the diagram >>>


By tymen1 at 2008-04-29

There are 3 separate drawings showing 3 different short trading cases. A red candle is shown for each case and a red stop loss line is shown. The base is shown with a blue dashed line from which the short trades start.

There are 3 legs to each trade and each trade is opened with 2 lots.

1st case

In this case 1 lot was closed at the end of the first leg thus giving a small profit. (say 10 pips).
The 2nd lot is dragged thro the pullback for no good reason. It accomplishes nothing and we simply have to wait until it goes down again to generate more profit.
It does this on the 3rd leg.

2nd case

Same as before except that at the top of the 2nd leg another lot is added. The computer averages the two lots and the new entry is lower down from the top but between the top and the blue line.
The price goes down on the 3rd leg but this time we profit with 2 lots instead of one.

3rd case

In this case both lots are exited at a very small profit (say 10 pips).
The pullback (shown in green) is totally risk free since there is no trade!!
We then re-enter the pullback at the top with two lots again and it goes on to profit as before.

This 3rd case appears to have some real advantages. Both short legs were traded with 2 lots giving maximum profit.
The pullback was totally risk free since there was no trade at this time.

But are these advantages real? And can they contribute to a better risk/reward?

We will find out as we now consider some longer term trades.

[tymen1]

Consider the evening star short trade below >>>


By tymen1 at 2008-04-29

This is a daily chart with a nice evening star setup. The upper Bolinger band is level telling us of a good trading opportunity. But the red candle of the star is not as long as it should be so we set the stop loss as shown.

The trade is entered short with two lots at market (base of 3rd candle of evening star).

In this trade there is no pullback thro the short entry. This will simplify matters in some of our considerations.

The exit could be anywhere near the end of the chart.

Next post we look at 4 hour chart which is to be our Keltner entry chart.

[bernbeach]

Thanks Tymen for starting on to this medium term subject.
I am eager to know what I can learn. In addition, as you can see in my profile, I will tithe 10% of my earnings (after recuperating €3K losses first) to humanitarian causes. The first 10%, thanks to what succeeded from your teaching, I will send to a planetarian or human cause, Tymen, you support.

PS: Van oorsprong hollander (Schiedam) Ik woon nu sinds 1971 in Ottenburg, Belgïe. Laten we hier iets goeds van maken. Ik kijk ernaar uit dat ik dit met succes kan toepassen, Tymen. Beste groet. Harry

[bernbeach]

Originally Posted by tymen1

Consider the evening star short trade below >>>


By tymen1 at 2008-04-29

This is a daily chart with a nice evening star setup. The upper Bolinger band is level telling us of a good trading opportunity. But the red candle of the star is not as long as it should be so we set the stop loss as shown.

The trade is entered short with two lots at market (base of 3rd candle of evening star).

In this trade there is no pullback thro the short entry. This will simplify matters in some of our considerations.

The exit could be anywhere near the end of the chart.

Next post we look at 4 hour chart which is to be our Keltner entry chart.

Hi Tymen
I have two questions:
1) what are is the days on eurousd daily chart morningstar: are these 22nd through 24th april?
2) I enclose in word doc usdjpy daily chart: a real morningstar pattern?
I look forward to receiving your replies.
Have a good day

[greywolf238]

Bernbeach
The chart looks like it's from the 2 to 24

If you are talking about the 3 candles i circled in yellow, then no that doesn't look like a morning star to me. The third candle's body is to short.
The rules for a morning star
The first bar is a large red candlestick located within a defined downtrend.
2. The second bar is a small-bodied candle (either red or white) that closes below the first red bar.
3. The last bar is a large white candle that opens above the middle candle and closes near the center of the first bar's body.

[tymen1]

Originally Posted by bernbeach

PS: Van oorsprong hollander (Schiedam) Ik woon nu sinds 1971 in Ottenburg, Belgïe. Laten we hier iets goeds van maken. Ik kijk ernaar uit dat ik dit met succes kan toepassen, Tymen. Beste groet. Harry

Thanks bernbeach. Yes I do speak, can read and write Dutch - I do understand this!

[tymen1]

There is an error in my reasoning in post #391.

Did you see it?

It will not affect the method of trading or our search for a good risk/reward ratio.

However, if you are an astute trader you should be able to find it.

I am interested in seeing who picked up the error.

[tymen1]

Thanks to you Greywolf238 for anwering the question put by Bernbeach.

The chart is indeed from 2-24 April and the evening star is 21/22/23 April.

As for your chart :

It is difficult to discern your candles because there are such huge spaces between them.

But for a morning star, this one only just passes -greywolf238 is correct in what he says.

The morning star should also be at the bottom of a downward trend to be really effective. It then heralds the coming of a new uptrend.

[tymen1]

Now to continue our analysis of the daily evening star in the post above.

Here is a 4 hour chart with a Keltner channel.


By tymen1 at 2008-04-29

This chart shows a stochastic instead of a MACD. We will use a stochastic in the next chart to try to discern a truth.

In this chart the middle BB is basically level, the MACD was going down, hence the resultant was going slightly down giving a best entry just below the middle Keltner.

This is where the price was at the short entry (black line) and the short entry was at market (start of 4th candle) at 881.

Our KC entry method has now been superceded by using one lot (or half of our allocation) and adding the 2nd lot at the top of a retracement. This gives consistantly a better short entry.

The stochastic shows that the price is going down.