THE JOY OF CANDLESTICK TRADING - a Learning Experience

[tymen1]

Originally Posted by greywolf238

Tymen,
I'm wondering if it would be best to take trades that only agree with the resultant of the BB and Macd.
Example, in the last trade you showed us you said "At my short entry the MACD was going up, the BB going slightly up - resultant going slightly up"
So with an evening star pattern, which we always short, a resultant going up is not what we want, unless you have a wide stop loss and stay in the trade a bit longer hoping it corrects itself.
The resultant was correct after all, it did go up and hit your stop loss.
Your thoughts please..

I quoted you directly here so that other readers could see your post and my answer.

No! No! No!

There is absolutely no correlation between the KC resultant and the ultimate outcome of the evening star price action.

Most of the time an evening star gives great profit by price action going down (trading short).
But usually there are immediate retracements and the KC chart aids in getting the best short entry on these retracements.
To get this best short entry the resultant, by definition, must be going up.
Yet the ultimate price action will be going down to get our profit

The Keltner approach is only an aid to getting a best entry price should there be a retracement.

A lot of the time the best short entry on an evening star is the opening of the 4th candle. In these cases the resultant is nearly always going down.
The subsequent price action here could be either down to profit or up to a price retracement and then down to profit.

But when the Keltner approach does work the short entry is usually a good deal better than the opening.

Hope this helps.

[tymen1]

And now, to show what I was raving about :
how we put a permanent end to these lost trades!!

Its so easy!!

When we enter short at a high point we let the price go down then .........

............we shift the stop loss!

............to a point which is the distance of the spread below our entry point.


Huh ????


Let me take an example.

Say we are trading pair A/B with a spread of 3 pips.
Now we entered at, say, a price of 50.
Our stop loss is sitting at, say 75.

Lets say the price action is now hovering somewhere below 50.
We then move the stop loss to 47.

If the price should backfire on us, and retrace completely, then it will hit our new stop loss and we will get out of the trade with nothing.............
............no profit, yes..............but also no loss !!



This whole idea is nothing new. But in our search for achieving and maintaining a correct risk/reward ratio this will become important.

In order to get a high short entry, the next post shows a revised trading plan attempting to cover all short trade types. In these the shift of the stop loss is shown.

[tymen1]

In this diagram, I attempt to portray the trading sequence as we know it now in order to preserve a correct risk/reward ratio and also a good win/loss ratio.

Notes below diagram >>>


By tymen1 at 2008-05-09

There are 2 drawings and they look complicated at first. Lets go thro them :

Pips first trade

At A we enter short with one amount using the KC chart method to get best entry. It is usually entered at the "open" but quite often a much better short entry is obtained. A stop loss is set near the top of the 3rd candle or above the top of the star according to our risk assessment.
A small target profit is set.

At B the target is reached and the trade is closed. The stop loss is also promptly closed. Since the price went down, the stop loss is really irrelevant.

From B to C the price retraces and we simply rest and watch.

We re-enter short with 2 amounts at C, wait for the price to fall, then shift the stop loss (D) as explained in the post above.

A much bigger target profit is set at E where 1 amount is closed, then the remaining amount is traded short according to intuition.



Retrace first trade.

At A we enter short in exactly the same way as the "pips first" trade.

At B we frown as we see the price action going against us, going to a retracement/pullback.

At C we detect the limit of the pullback and we enter short the 2nd amount.
The computer averages the 2 entries and we grimace as we see that our 2nd entry is still above the average and therefore we are still in the negative.

We wait for the price to fall, then shift the stop loss (D) as explained in the post above.

We set a decent target profit at E where 1 amount is closed, then the remaining amount is traded short according to intuition.


This diagram is subject to revision.

How do we know where the retracement peaks are??

Well, there is plenty of meat to digest in the posts so far, so I will post that answer tomorrow - going shopping so I will probably post late.


Comments welcome.

[trav72]

Firstly, i think you are brilliant, and i am learning your ways thoroughly and in silence, as everything is there in your thread.......But here i am now, and i was wondering when the price 'retraces first' as in your diagram and then it hits the 'peak', and so then, as you describe, we place another amount 'C'. At this point i would be extremely nervous that the price would continue up and i would be just doubling up my loss.. as i have done before in demo....mmm and live too, thinking it would return to going down. Though i understand that thinking it will go down is different to having the strategy to back you up to telling you it will go down..So....
Where would the stop loss be placed for amount 'C'?
At the same stop/loss as A or further back up......
thank you
travis

[greywolf238]

tymen thanks for the explanation.
How do we know where the retracement peaks are?? That's the million dollar question. I'm not sure what the answer is, i look forward to yours.
We would definitely have to have a good idea of that, otherwise we would be adding to a losing position.

[VulcanClassic]

Originally Posted by greywolf238

tymen thanks for the explanation.
How do we know where the retracement peaks are?? That's the million dollar question. I'm not sure what the answer is, i look forward to yours.
We would definitely have to have a good idea of that, otherwise we would be adding to a losing position.

I've been wondering that too,

retrace or reversal? Million dollar question for sure!!
I guess that's what the stop loss is all about, even though you've added to the position, the second amount won't have lost as much as the first. Better than if you went all in at first entry.

[tymen1]

Originally Posted by trav72

.......i was wondering when the price 'retraces first' as in your diagram and then it hits the 'peak', and so then, as you describe, we place another amount 'C'.
travis

Welcome to this forum and welcome especially to this thread on candlesticks.

I notice that this is your first post. You are asking a very intelligent question ie where is the top of the retracement?

This question is now being asked also by Greywolf238 and VulcanClassic and probably every other reader as well.

Just to answer your other questions first :

At this point i would be extremely nervous that the price would continue up and i would be just doubling up my loss

If you have chosen the evening star carefully (long red candle etc) and checked for a "sedate" BB then the price action should go down and not continue up. This is the whole reason for the existance of this pattern - it signals a reversal. A retracement should be just that, and no more. This is the case in about every good evening star I have traded.

You can place the 2nd amount with confidence.

The very worst that can happen is that you enter short at the opening of the 4th candle and the price goes straight up to your stop loss. If that is the case I would question your choice of evening star pattern. I have not seen this happen but have seen retraces come within 2 pips of the stop loss.

Where would the stop loss be placed for amount 'C'?
At the same stop/loss as A or further back up......

Leave the stop loss in the initial position until you feel sure that you can shift it without price action doing a prompt reversal. Then move it. If the price subsequently does reverse you have lost nothing.

How do we know where the retracement peaks are??
...............so I will post that answer tomorrow

.....from my own post.

So now to answer this question.

Next post.

[tymen1]

Finding the top of a retracement after an evening star pattern is not as difficult as you might think but not super easy either. You have to look carefully.

The answer is to go to the KC chart.

On here drag the MACD down to its smallest size so that the price action fills your screen - maximum view.

On this chart you will have your Bolinger bands and Keltner channels (period 4, factor 1) and possibly also the Starc bands. The Starc and Keltner bands will follow each other closely.

For good colour contrast use blue or dark grey for the BB, orange for the Keltner and dark green for the Starc. Remember that you also have colours for the candles so therefore my colour suggestions as given.

Look at the 2 drawings of a KC chart below >>>


By tymen1 at 2008-05-15

These diagrams show the basic principle on how to detect a retracement/pullback top. You do not have to enter at the exact top (you do well if you do) but close to the top is good.

The 2 diagrams show the blue Bolinger bands, orange Keltner upper and lower bands (middle band missing - irrelevant) and also the upper and lower Starc bands in green.

For good contrast and clarity for readers, I have filled the middle of the Keltner/Starc bands in grey.

The overall general direction of price action is shown by the pink arrow.

A candle is shown. It can be green or red, does not matter. Note that the wick or top penetrates the bands.

In the first diagram the Keltner/Starc bands are going up and the highest candle wick or top penetrates all three bands as shown. The upper Bolinger is tagged or penetrated.

In the second diagram the Keltner/Starc bands are going down (it is subtle - look carefully!!) and the highest candle wick or top penetrates all three bands as shown. In this case the middle Bolinger is tagged or penetrated.




IMPORTANT NOTE

On looking back thro this post I have discovered an additional entry diagram. When the Keltner/Starc is going down the highest candle wick/top may also tag/penetrate the middle Keltner/Starc at the same time as the middle Bolinger.
I will revise the diagrams next post to save confusion




To assist you in becoming competant with finding these pullback tops, the posts that follow will look at trades where this matter is dealt with in detail.

[Piphacker]

Hi Tymen
I Really like your thread Coz i am also trading through this wounderfull pattren on higher timeframe's... Just read it almost all Now...Thank's for your wounderfull contribution's ... Really Seem's Usefull for everyone here...
PipHacker

[tymen1]

To Piphacker :

Thank you for your compliments.
I trust you will do well on the higher time frames – some of our veteran traders are using those time frames as well.

Just a little tip for your posting.

Try going one size up in your typing and switching off the “bold” tab. Bold print is used only for emphasis.

All the best!