EC patterns are definitely very powerful, especially on higher time frames,
When all three sessions result in a candle being overwhelmingly bullish or
bearish it probably means something
when a candle on the M1 or M5 prints a similar pattern it can be 10,000
times less substantial and convincing than the weekly time frame! - a blip
Today some very compelling setups on both Daily and Weekly.
Of particular note are currencies where there are confluent setups on both.
A beautiful sample here of engulfing pattern on GBPJPY -
There are many conflicting schools of thought and I reject rules that just
plain don’t make sense to me.
So currently here are my rules for EC patterns:-
Range of Signal candle must engulf range of preceding candle
The signal candle body does NOT need to engulf the body of the preceding candle however the body (Close) must exceed the range ie High or Low, of preceding candle.
The Close of candle must be in the top or bottom 25% of range, the ideal close being a ‘Shaved head’ where the close is equal to either the Low or High of candle. Some say within 33% of top or bottom, - it may still be profitable but I’m looking for no ambiguity.
I use ammended Fib tool to check for below bottom 25% or above top 75% - makes life much easier and eliminates error - This is an important rule, unless the Close is decisively near top or bottom I cannot consider it unequivocally bullish or bearish
The Entry candle must exceed range of Signal Candle by at least 10 pips. If it is very much less then I will hold back for another one or two candles and will be looking to enter as much as 30 pips beyond the High or Low of Signal Candle. If nothing much has happened within three candles I place the currency on my ‘Watch List’ but I would then need extra compelling reason to enter as
no Signal is relevant forever, - so ideally I want to see movement within the next one or two bars.
Exit - This is tentative but one Fund Manager managing at least $750 Million,
backtested EC patterns with NO S/R zones whatsover on Daily chart only and turned $10,000 into over $2 Million. His strategy was to stay Long or Short until an Opposing EC pattern emerged and then simply Close and Reverse. So an excellent example of letting winners run.
I believe he is genuine, and he wasn’t even selling a service when relating this, but one thing didn’t quite ring true - Letting winners run on higher time frames is where the money is made, I already know that, but he claimed backtesting over 11 years on EURUSD yielded 86% win rate.
I have always associated very high Win rates with only modestly
winning systems and even losing systems that might win a little most
of the time but the rare massive drawdown all but wipes them out.
Usually, letting winners run in a trend following system relies on just a
very few really big wins that just go on and on, even though most trades
might lose for a moderate loss.
So even with a 30% win rate, with most losers losing between
1% - 3% but some of the winners chalking up 10%, 20%, 30%+
you would still do very well and $10,000 could be turned into
$2 Million with compounding.
I would not expect this style of trading to return 86% winning trades or even anything like it. but I like the sound of his approach albeit a little skeptical regarding the stats.
It will be interesting to put this to the test - something profitable is likely to come of it
Also very curious that a Fund Manager should recommend a Micro account so that you could risk 2% precisely on every trade, which you can’t usually do on HTFs with a standard account
It makes mathematical sense but I didn’t think anyone took PAMM micro accounts very seriously, and I have seen Broker warnings to the effect ‘‘This PAMM manager’s Micro account allows him to take extremely high risks!’’
If there is one thing investors are not looking for its very high risks - indeed any risk at all!
but at any rate I’m quite sure that higher time frames, and letting winners run, is where long term success in Forex trading is to be found