THE JOY OF CANDLESTICK TRADING - a Learning Experience

[sinn1]

Originally Posted by tymen1

That is, a total profit of 58 pips. (2x29 = 58)

The initial stop loss was at 51.
Our initial short entry with 1 amount was at 22.
Now the distance from the entry to the stop loss is 51-22 = 29 pips.

That is, if we had lost this 1 amount with the trade going against us, we would have lost 29 pips.

Now the profit was 58 pips.
Loss potential was 29 pips.

So we have a risk/reward ratio of 1:2
This is excellent.

I trust that the details of this trade presented here will be informative and of use.

Hi everyone, I am new to this thread. I have read through all of Tymen's posts so far and it all seems quite informative. Thank you Tymen for your input.. I would like to possibly use certain aspects of your candlestick strategy to judge better entry points on other strategies.

I wanted to ask a question about the quote above... Tymen wrote that the 'loss potential' on that trade was 29pips and the reward was 58 pips.. but to me it looks like he has calculated reward based on the 2 positions he opened (2 x 29pips = 58), and he only calculated loss potential on the first position opened.

Have I misunderstood/misread something there? Can Tymen or anyone explain this or elaborate on this for me please.

Also, it doesn't look like he has included a stop loss for the second entry.. or is the stop loss for this the same as the stop loss on the first entry? (I may have overlooked an explanation on the stoploss for a second entry in a previous post so apologies if I have!)

Thanks again for your input Tymen, as well as everyone else.

Jc.

[greywolf238]

Originally Posted by sinn1

Hi everyone, I am new to this thread. I have read through all of Tymen's posts so far and it all seems quite informative. Thank you Tymen for your input.. I would like to possibly use certain aspects of your candlestick strategy to judge better entry points on other strategies.

I wanted to ask a question about the quote above... Tymen wrote that the 'loss potential' on that trade was 29pips and the reward was 58 pips.. but to me it looks like he has calculated reward based on the 2 positions he opened (2 x 29pips = 58), and he only calculated loss potential on the first position opened.

Have I misunderstood/misread something there? Can Tymen or anyone explain this or elaborate on this for me please.

Also, it doesn't look like he has included a stop loss for the second entry.. or is the stop loss for this the same as the stop loss on the first entry? (I may have overlooked an explanation on the stoploss for a second entry in a previous post so apologies if I have!)

Thanks again for your input Tymen, as well as everyone else.

Jc.

I'll answer what i can, Tymen can correct me if i'm wrong.
It was based on 2 trades, after the first trade was taken, it made a small retrace, once that was done, (we hope ) and the trade continues in our favor, we reset the stop loss below the first entry minus the spread distance.
Basically the stoploss is moved to break even, that's why he says it's a riskless trade. The same S/L is for both entries.
Hope this helps.
Tymens posts are always chock full of info, and i always have to read them several times before it sticks..

[BrianSNJ]

Originally Posted by greywolf238

Tymens posts are always chock full of info, and i always have to read them several times before it sticks..

Ditto for me!

[sinn1]

Hi Greywolf,

Thanks for the reply.

I understnad that the trade becomes riskless after the stoploss is adjusted.

But between the 2nd entry and the stop loss adjustment, there is still risk being added. Is this not taken into account when the 'risk:reward' ratio is assesed?

What is the stoploss on the 2nd entry before it is adjusted? Is it the same as the stoploss of the 1st entry?

I just looked at Tymen's post again and calculated the risk potential of the 2nd entry (if it's stoploss is the same as the 1st entry), and it only adds 3 pips. That really isn't a lot after all but it would still be helpful if someone could confirm what the stoploss of that second entry should of been.

Thanks again

[greywolf238]

Ok here are my answers to Tymen1's homework.
Exercise 1 i would not have taken it, it looks like an evening star pattern, and it is on the upper BB, but i prefer that the body of the 3rd candle be about half way down the first candle and not the wick. The BB are flaring too much.

Exercise 2 i might have taken that depending on a few other things, like were are the nearest S/R lines and what does the charts look like on other Tf's. What's the direction of the overall trend. The body really isn't half way down the first candle. It is on the upper BB and there not flaring out as much as the first chart. If i did take it, i would be watching it closely.

[greywolf238]

Originally Posted by sinn1

Hi Greywolf,

Thanks for the reply.

I understnad that the trade becomes riskless after the stoploss is adjusted.

But between the 2nd entry and the stop loss adjustment, there is still risk being added. Is this not taken into account when the 'risk:reward' ratio is assesed?

What is the stoploss on the 2nd entry before it is adjusted? Is it the same as the stoploss of the 1st entry?

I just looked at Tymen's post again and calculated the risk potential of the 2nd entry (if it's stoploss is the same as the 1st entry), and it only adds 3 pips. That really isn't a lot after all but it would still be helpful if someone could confirm what the stoploss of that second entry should of been.

Thanks again

The way i understand it is, after the 2nd entry, the original SL is still in place. Only after the retrace and after the trade has gone in our favor, he moves up the SL.
The risk/reward is calculated on both trades and not just on the first or just on the second, because after the SL is moved up it's in place for both trades.
That's the way he did it anyway.

[keitsuke]

Great idea to give homework Tymen!

My answer is I wouldn't trade either. Simple reason being the fundamental criteria of an evening star is not met, i.e. the third candle does not close more than half way into the first candle.

Hope I'm right.

[fxprof]

thread is interesting is there any particular time frame for this patterns?

[tymen1]

To Sinn1 :

Though I am flat out with my legal work for my court case on Thursday, I will quickly answer your question.

Thank you for posting your question - it is these inputs that make the evolution of this risk/reward ratio problem solvable.

To Greywolf238 :

Thank you for attempting to answer this question beforehand and hopefully save me the labour. You understand the matter well and have answered as best as you could!! Thanks again!!

Originally Posted by sinn1

I wanted to ask a question about the quote above... Tymen wrote that the 'loss potential' on that trade was 29pips and the reward was 58 pips.. but to me it looks like he has calculated reward based on the 2 positions he opened (2 x 29pips = 58), and he only calculated loss potential on the first position opened.
Jc.

No error here, the first short entry was for only 1 amount. The initial stop loss was set for this 1 amount at 51.
Short entry at 22.
Thus 51-22 = 29 pips.

At or near the retracement point of 48, we add a 2nd amount and the computer averages the entries to 35.

The stop loss remains at 51 until we reset it at say 3/4 pips (spread distance) below the computer average of 35.

But between the 2nd entry and the stop loss adjustment, there is still risk being added. Is this not taken into account when the 'risk:reward' ratio is assesed?

What is the stoploss on the 2nd entry before it is adjusted? Is it the same as the stoploss of the 1st entry?

I just looked at Tymen's post again and calculated the risk potential of the 2nd entry (if it's stoploss is the same as the 1st entry), and it only adds 3 pips.

Now it could be argued that until we reset the stoploss we have 2 amounts trading at short entry 35 and stoploss 51.
Then 51-35 = 16 pips and with 2 amounts this gives 32 pips which is 3 pips more than my calculated 29 pips risk.

However, all this is academic. This is precisely why we have the Bollinger and Starc bands in place.
The retracement is by definition, just that. It is the top of the expected price action. How do we know that??

Because we tag or pass thro the top BB and top Starc band. These are complete extremes.
Because price action here is an extreme, we define this as a retracement point.. Price action at this point is extremely unlikely to go higher.

As such, we consider the probability of the price action to go still higher and hit the stop loss to be effectively negligible.

We can, therefore, enter the 2nd amount at the retracement point with confidence and consider that the price action will go no higher. In fact, it should now go down.

While this is happening, the stop loss remains inert. It could be considered a PCI stop loss.

Remember that a stop loss is really an academic thing unless it is actually hit.

As I posted earlier, the risk/reward ratio in these candlestick trades is not as straightforward as in ordinary trades. In an ordinary trade you set the stoploss and takeprofit to planned levels and you can switch off your computer if you like.
Your risk/reward ratio is calculated beforehand by you, the trader.

But in these candlestick trades, the stoploss is set by the pattern and not by a planned level. Same to some degree with the takeprofit.
Hence the risk/reward ratio is only discovered after the trade is finished.

All we can do is make sure that the risk/reward is in our favour beforehand but the exact values remain unknown until the end of the trade. To accomplish this favour beforehand is the current subject in this thread.

[Ray_1]

From what I had learned from tymen1's thread, here is my answer.

Exercise 1:
I will not trade this pattern. It is not an evening star. The close of the third candle is higher than the opening of the second candle.

Exercise 2:
I will also not trade this evening star pattern as tymen1 has always said trade quality pattern only. The close of the third candle is not more then half of the first candle.

Hope my answer is close to tymen1 's answer.