THE JOY OF CANDLESTICK TRADING - a Learning Experience

[truzpip]

I've just finished reading the whole thread and must say Tymen that I have really enjoyed it. It's very well made and you have an hability to explain that it makes it all cristal clear. It seems really easy when reading the thread to start trading, and it really is! I have only traded extremely high quality patterns and all have been positive trades, eventhough I've traded very little.

Regarding the homework you left I would definitely decline trading any of the two. Reasons:

1) This is the one I thought maybe would be tradeable because of the gravestone doji four candles before the morning star pattern, If the morning star pattern would be a solid one (no short shadows on the second candle both ways and not the little body of the red candle) I would definitely had taken it as a confirmation of a reversal, but the last candle is very poor and wouldn't trade it, not even if a fourth candle appeared red.

2) This one lacks the same basic foundations as the first one, the extremely long down wick is enough to forget about this trade, maybe looking at different timeframes to see if a more solid pattern forms would encourage me, but that exact timeframe shows a weak pattern.

That being said I want to thank you once again, you really are adding karma points with this kind of help

[tymen1]

Well I am back after a hard week.

Lets press on.

I have exciting material ahead - stuff which will bring the search for the favourable risk/reward ratio to a dramatic climax. All is not done yet and the method of trading is about to change again - for the better.

Now the exercises. There will be plenty more of these as we go along.

Everybody was correct - we are indeed all learning which is excellent!

Lets have a look at how these exercises panned out.

[tymen1]

Exercise 1 - Answer


By tymen1 at 2008-06-02

This was not even an evening star pattern!! The question was a deliberate "red herring" to see if readers were awake.

The "star" candle, if you can call it that, was much bigger than the red candle.
And the red candle is nothing. It does not even go down past the star, let alone the 1st candle!

So this is quickly dismissed as a trade.


Exercise 2 - Answer


By tymen1 at 2008-06-02

This evening star candle pattern violates an important matter in these trades.
The price action should really be increasing slowly upward and the pattern brings an end to this upward creep.

But in this pattern, the 1st candle jumps straight out of the middle Bollinger band. This is a no no for trading evening stars. Do not trade evening stars when the 1st candle is still stuck in the middle Bollinger band.
The rise is too spontaneous and too rapid - anything could happen.

Further, the "star" has a bottom shadow that is really too long and the red candle is rather short although the top shadow length is ok.

The BB is showing signs of "trumpeting".

All this makes for a no trade or a very risky trade at best. If traded the stop loss would be set 3 pips above the star.
No great profit potential - the price action after the pattern is rising and is not even going level.

[tymen1]

Now a couple of special teaching matters.

Firstly, look and read the following hyperlink regarding trading mistakes. It will become important further down the track.

Weekly Trading Lesson: Making and Correcting Trading Mistakes

Secondly, great news for those who are looking to trading longer timeframes such as 4 hour and upwards. There have been requests for me to post more material on longer timeframes.

However, this thread is best suited to shorter timeframes so I now direct those longer timeframe people to the following candlestick hyperlink. In that case, use this thread as a learning base.

This thread by Topchess, who is a veteran on this forum, and whose wisdom I greatly respect, shows how to easily trade 4 hour time frames using Heikin Ashi smoothed candles. This system is readily useable with the GFT program.

How to successfully swing trade the markets? (HAS Method)

[tymen1]

A point of instruction about KC charts >>


By tymen1 at 2008-06-07

Here is a 1 hour main chart with a MACD and BB.

The MACD and BB vectors have been put on this chart with a resultant at the entry point shown with a vertical line !!

The prediction fails badly with the resultant vector going up and the price action going down.

Never use the KC prediction method on your main charts.

This method was never designed for this. It is meant to work only on subsections of the main chart, that is smaller time frame charts, approx 1/5 to 1/5 of the main chart.

[tymen1]

Thank you Truzpip for your very kind compliments in your post above.


A new element now appears in the trading strategies of either "pips first" or "retrace first".

It appears in the chart below >>>


By tymen1 at 2008-06-08

In this chart we see an immediate drop in price, therefore, this is a "pips first" trade. We enter short with 1 amount, set a stop loss and exit after a target of, say 10 pips.

But the price keeps going down! We do not know that this is going to happen. Our target is set and it will exit at this point.
But we want the rest of the pips!!
So what do we do?

I refer now to the small red candle after the star pattern. This candle goes thro the mid Bollinger band.
You will see that it has a lower wick.
The next candle, the very long red one, starts at a higher point again with an upper wick.

I did not save the 5 minute chart on this trade but the lower wick of the smaller red candle would probably have passed thro the lower Starc band. This then becomes our exit point on a pips first trade - a tag or pass thro of the lower Starc band.

The upper wick of the long red candle is then a retrace. It is probably identified by a tag or near tag of the upper Starc band. Here we would re-enter short with 2 amounts. This follows thro to the profits.

These observations are a preliminary to evolving a revolutionary new trading approach which will bring in huge pips in these short timeframes!!

Watch for it. Exciting times are ahead!!

[tymen1]

I wish to make a teaching point here.

For KC entries, the Keltner bands are best. But for detecting retraces and exits, the Starc bands are best.

When you embark on a trade (eg EUR/USD), it is a good idea to have your main chart, then your KC chart with MACD, BB and Keltner bands on it, and also another KC chart with no MACD and no Keltner but instead have the BB and Starc on it.

So, have the following charts..........

1) Main chart.
2) 5/10 min chart with MACD, BB and Keltner.
3) 5/10 min chart with BB and Starc.

1) The main chart detects the pattern and monitors the trade.
2) The 2nd chart is used to get the best short entry.
3) The 3rd chart is used to progress thro the trade and toggles between it and the main chart.

[tymen1]

In order to prepare for the new trade approach (which will simplify a number of things), I will look at another quality evening star trade.

As soon as our new trading approach is finalized, I will be progressing on to other types of candle patterns. I will start with a long pattern to compliment our evening star short pattern.

Now the pattern below has a problem in that the 3rd candle upper wick is higher than the star wick. In any case, the price was driven down and this trade makes for an excellent example of a number of points I wish to make >>>


By tymen1 at 2008-06-07

This example has everything that I want in it - a powerful red candle, some good retraces and a good follow thro for profit.

In the following posts I will go thro the KC short entry and the completion of the trade.

But I will do this tomorrow. There is enough here to digest already.

[BrianSNJ]

Originally Posted by tymen1

As soon as our new trading approach is finalized, I will be progressing on to other types of candle patterns. I will start with a long pattern to compliment our evening star short pattern.

Tymen -
I was wondering about this. My question is unrelated to this system and I don't want to take this thread in another direction, however, I was wondering if you had some other systems that you were working on and are going to teach us in the future. Preferably in a WHOLE NEW THREAD. lol

I am also very curious to read, learn and discuss your knowledge and personal experiences with candlesticks and how/what works with Forex.

If you do this, I would hope it would be a dedicated thread on that topic only.

I realize that candlesticks work differently with different markets. Yes, things are similar, but I have read that the way patterns work in the stock market may work(or not) in the Forex market in another way.

Ergo, anyone with half a brain would enjoy learning from those with a deeper understanding opf candles in relation to Forex. I don't mean through a system...but in general.

Thanks for all the great new material here! Hope all is going well with your case.

[tymen1]

To BrianSNJ :

You have actually asked a difficult question............

I was doing research on another form of trading, that being of working solely with Keltner channels and using Keltner channel trading. I did a lot of testing with this method and it has the potential to make thousands of pips.

However, I found that exits were nearly impossible to predict and after receiving confirmation from FX Honourary member Dale Paterson, that he too found the exits impossible, I decided to abandon the work.

I have interest in no other method of trading - as far as I am concerned, candlesticks are the Rolls Royce of trading. I think that I have made that rather clear in the early parts of this thread.

As for the rest of your question...............

There is an enormous amount of work involved in preparing posts for this thread, and that in logical order. I have my work cut out here. That is why you see little of me on other threads even though I enjoy anwering all those other questions people ask.

Also my main work is on the stockmarket, not forex - so most of my time is devoted there. I have found candlesticks to operate the same in both trading forms. And that appears to me to be logical.

Therefore, the best way to find out what I know is to continue reading this thread.
Steve Nison's books are the main source for all candlestick knowledge.