THE JOY OF CANDLESTICK TRADING - a Learning Experience

Beginner Questions
326

Sorry about my omission Vulcan Classic. Recovering from illness, I had to get back to the share market, my main income. I saw the other posts but this one I missed.

So now to answer :

No, I take each pattern individually - no blending.
It nice to watch the same price action happening on all the other times frames in front of you but I religiously stick with the one chart where the pattern has appeared.

This has to do with consistancy. Imagine that this was the only chart you had. Now you see a beautiful candlestick pattern on it with great potential.
Would you trade it?
Of course you would.

You would not say - oh well, I will give it a miss and check out other time frames first. Confusion would set in and you would make no money.

Although longer time frame candlestick patterns are more reliable because they encapsulate more of the market and that over a longer time period, that does not negate the use of shorter time frames.

Further, I believe we have beefed up the reliability of our charts by trading only on the outer Bolinger bands.

These bands are proven to work. I got the idea from reading my copy of the book ā€œBolinger on Bolinger Bandsā€ by John Bolinger, published by McGraw Hill in 2002.

327

Congratulations, Dank, on your choice of candlesticks as your trading method.

I know you will never look back - especially once you start making pips ie money while those indicator traders just keep on losing it. :smiley: :smiley:

Q1) At the moment we have no hard and fast stop loss rules except that you should start by placing your stop loss at about 3 pips above or below the extreme point in the candlestick pattern.
eg in the evening star, you would place your SL 3 pips above the ā€œstarā€.

You should set you number of lots traded so that should you lose the trade, [U]then you would lose at most, about 2% of your total trading funds in the bank[/U]. This is standard universal trading wisdom that is used in the share market, futures, forex or whatever you may be trading.

If your SL causes you to lose 10% of your total trading funds in one hit, that is [U]far too much[/U].
Re-read the relevant Babypips school section on this subject again!!! :eek:

Now we have yet to discuss the matter of risk/reward ratio on this forum.

Q2) Not comfortable with a timeframe eh. Thats why I have 9 time frames from 20 mins to 1 hour. This gives me more patterns - a bit like a net for catching fish. More fish in a net than just with a line and hook.

As I have said earlier, you can choose any time frame you wish, be it 20 mins (donā€™t go lower), 1 hour, 4 hour or daily - its up to you.

The lower time frames show patterns up more frequently (this should be obvious), and, therefore, there is more action - a bit like a James Bond movie.
You make less pips on the lower time frames but at least you are making them and not waiting for them. :smiley:

I see 2/3/4 patterns in any morning 6 hour period. That makes for trading, not watching and waiting.

You also develop your skills better by trading more frequently. (more practise).

Hope this helps.

328

Right now, I am very happy that others are now posting as well. For a while, I really felt that I was running a monologue.

However, there are still more things I would like to present such as trading with dark cloud covers, piercing patterns etc, as well as an improvement to the KC entry method !! :slight_smile: :slight_smile:

I would be interested in hearing from other posters whether other broker charting programs also allow the viewing of multiple charts.

329

Tymen ; I have Oanda and GFT accounts they both have as many charts per screen as you would like.
GFT can only be opened on 1 computor at a time. If you try to open your account on another machine it closes previous one. You could open a live account and demo and have 2 machines running to help in ALL these charts we want to look at. I LOVE GFTā€™s charts. Donā€™t care for there entry system.
Oanda you can open your account on multi machines at the same time . So if your working moving around you could monitor things from different rooms. I really like there order entry system It allows you to setup your parameters. Such as position size in $ amount or pips your targets in pips or $ amount. then just one click entries and everything is set already every time.

330

Risk/ reward would be a wonderful next topic.

This is the only major shortcoming I see in trading candlesticks. I have a hard time scalping for 10 pips when my stop loss (the high point of the formation) could be 20 or more pips away. In fact, I have had great success trading candlestick formations alone the last week or so, but Iā€™m actually at a net loss due to big stop losses (Yes, I realize big risk/ small reward breaks a prima facia rule of trading- I like breaking rules though, and sometimes it pays).

The other night, I set up Metatrader at either 30 min or 1 hr (sorry, canā€™t remember which) and counted the number of successful trades to number of trades overall since March 1. The ratio was something like 27:34, a truly amazing #! The caveat here is that I counted all candlestick formations, not just ones on the Bollinger Band. I know what youā€™re thinking, but when I subtracted the ones that werenā€™t on the band, the ratio didnā€™t significantly change. What this tells me is that the candlesticks are effective on their own. Donā€™t get me wrong, I still love this system as the Bollinger Bands add statistical credibility to the fact that a reversal is likely. Picking reversals is still risky, however, and it seemed like formations that happened mid-trend were almost as good. Sorry to stray off topic some here- there are many things I love about this system, and I plan to add them to this forum as we go on.

[B]The point of this post is this:[/B]

We have a very solid system here- better than any iā€™ve seen yet. We might need some solid money management that is somewhat specific to this system however, and here is why: If we assume the 27:7 win-loss ratio (which seems unrealistically high) and we gain 10 pips from each win and lose 20 pips from each loss, we donā€™t even clear 100 pips for six weeks after we pay the spreads. True enough, we havenā€™t lost any money, but we certainly havenā€™t expanded it much either. Plus, I should add that many of the 27 wins were just [I]barely[/I] 10 pip gains (another achilles heel), and that ratio is certain to decrease sooner or later.

If we can get money management straight, this system (or [I]approach[/I]- I hate calling it a ā€˜systemā€™; sounds so slimy) may be as close as we get to a holy grail! Iā€™ve tried other systems that have great money management rules but were mediocre otherwise. Iā€™ll try to think on this some, and see if I can come up with a solution- What do you think, Tymen?:slight_smile:

331

Oh yes, and keep the patterns coming. FXWords.com is great and all, but nothing beats seeing them in action!

As always- many thanks Tymen.

332

I believe tymen puts his stops 2 pips past the wick of the star on the 20min. I could be wrong, but I donā€™t think there would be to many situations where that stop would be as many or close to 20 pips. This is with consideration that he switches to a lower time frame to vector the best entry. Hmmmā€¦ maybe he will have a better answer on this one to help you and everyone else following.

333

Actually, theyā€™re pretty common. Hereā€™s one on the attached thumbnail (itā€™s the one with the checkmark). This was the first one I could find that is right on the Bollinger Band. It worked out (as most do), but letā€™s take a look at the numbers:

  1. Iā€™m assuming that I wonā€™t get the best possible entry, so Iā€™m just going to take a guess that I enter somewhere between the open of that first blue candle after the doji is complete (1.5811) and the high point (1.5825). If we split the difference, which would be a pretty good entry, we would get in somewhere around 1.5818.

  2. If we put our stop loss three pips above the point of the star, it would be 1.5839. Thatā€™s a difference of 21 pips. If we put our stop loss three pips above the highest point of the entire formation, it would be at 1.5841, a difference of 23 pips.

Again, Iā€™m making a lot of assumptions, but I also have to be realistic in that I will probably never get the best possible entry. As I said, this one worked out, but Iā€™ve had many go against me, and we would have to successfully scalp three more setups just to get above even.

Just to be clear, Iā€™m not criticizing this system- in fact, I love it! Iā€™m just probing around to try to make it a true pip killer. :cool:

(sorry if the pictureā€™s fuzzy- I never took the time to learn how to post within the actual posting).

workstation.jpg700Ɨ526 46.1 KB

334

I will let the master take over on that one. He will be far more helpful than me. Still a short on that trade would have turned out rather nice.

335

Dealbook Rocks!

I gotta say the rep from GFT has been pretty helpful. She showed me a way to set up dealbook so I can watch as many pairs as I want without overloading the computer.

Right now I have a workspace with 20 different pairs in it. I keep them on the 20M timeframe just to watch movement. Weā€™ll see how that works.

On a seperate workspace I have 12 timeframes (5m to 1H like Tymen, then 4H and Daily) for one pair. Hereā€™s the beauty of it; you start by opening a quote board, open linked charts (12 for me) then apply youā€™re templates to them. When you click on a different pair in the quote board it changes those linked charts to that pair, keeping the templates/timeframes.

I have four of these quote board/workspace arrangements, so there will always be one loaded for review while the others are loading.

Not sure if 20 will be too many to manage, if it is, Iā€™ll just scale it back.

Later . . . Yup, itā€™s too many. Will get rid of the corrollating pairs.

336

Mytwopips you are right. That one would have turned out to be a SWEET trade!!!

-Assuming that we donā€™t just close out after 10 pips that is. Even Tymen hates when that happens.

I really hate the kind of money management strategies that prescribe closing half of your units after a certain target is hit and letting the others ride, but maybe thatā€™s the solution- Most of the time we take our 10 pips and walk; the rest of the time we either get stopped out or pile on the pips. Good grief! More backtesting!

Yes, letā€™s see what Tymen has to say.:slight_smile:

337

Another thing we could do is lengthen our take profits based on the distance to our stop losses (if the distance to stop is 20 pips, then our take profit becomes 20 pips instead of 10). This is another fundamental thing traders do. My off-the-cuff guess is that our win % goes down a lot if we do this though. In my backtesting from March 1, there were many trades where we just barely squeaked out 10 pips before the candle raged the other way- These small wins would now have to be classified as losses.

338

[B]To Kenneth Lee [/B]:

Good to know that you are having success with multiple charts with Oanda. You seem to have come to grips with a good entry with Oanda. :slight_smile:

339

Gotta say I have been testing dealbook for awhile since you first mentioned it Tymen and I have come to agree with you that it is much more versatile than MT4. Started a conversation with Kinetic as well. Fancy the idea of an Aussie based broker

340

[B]To cbarnett808[/B] ;

Your quality posts deserve careful answers.

Risk/ reward would be a wonderful next topic.

I totally agree with this. We need to work on this because it is not right yet.

ā€¦ big risk/ small reward breaks a prima facia rule of trading

This is what we are up against at the moment and that is why I wanted to discuss it.

The Daily FX reports also come out with an analysis, but they are based on daily charts only. A plan is proposed with the risk/reward in the correct order but if you do lose, you will lose a lot of pips!
Further a risk/reward of 1:12 is analysed with good results. But the success of the candlestick patterns reduces to only 36%. :frowning: :frowning:

I am trying to get frequent trading opportunities, a high success rate and very small losses. So I want everything. :smiley:

I have some suggestions and will also introduce KC 5 min entries - intermediate methodā€¦ which I believe will get you better entries for a start.
Also, I need to explain my 3 stage entry system which is very powerful for entries.

This will go some of the way in solving the risk/reward problem but not nearly enough.

Either the risk needs to be lowered (lower the stop loss intelligently) or we need to let our trades run the full course - and that we need to do anyway. So minimize one end and maximize the other.

The ratio was something like 27:34, a truly amazing #!

I counted all candlestick formations, not just ones on the Bollinger Band. I know what youā€™re thinking, but when I subtracted the ones that werenā€™t on the band, the ratio didnā€™t significantly change.

That is very interesting. It is also very good news. Possibly explains why other candlestick traders do not consider the BB but they do, of course, trade with the more reliable longer term candlesticks.

But, while this may work with the 5 min KC entry method, I do not think it will work well with my 3 stage entry system. These matters need to be shown.

So much to explainā€¦not sure where to start.

[B]We have a very solid system here- better than any iā€™ve seen yet.

If we can get money management straight,ā€¦(ā€¦) may be as close as we get to a holy grail! [/B]
Emphasis mine.

[B]I absolutely know this to be true. We must assume that candlestick trading is the Rolls Royce of trading and work from there.[/B] We must not be distracted by indicator trading by turning to the left or right but rather remain diligently focused on our candlesticks.

341

[B]To Tonymand [/B]:

Just popped in while I was posting I see !!

Good for you Tonymand. I hope you come to a satisfactory result in your contacts and experimentation! :slight_smile: :slight_smile:

You are most welcome to post suggestions on dealing with this risk/reward ratio problem we are tackling now.

It seems to work ok in long term candlesticks but I am trying to get it to work well in our short term patterns.

342

[B]To cbarnett808 [/B]:

Your chart is a 30 minute chart, is it? Not sure why you have a Keltner pattern on this chart - you do not need it there.

Your thumbnail pattern shows an impure evening star pattern with the first candle high greater than the star. I would not have traded this pattern, but even so, it shows excellent profit and, as such, the initial retrace is of little consequence.

Just further along is an engulfing pattern calling to go [B]long[/B]. It succeeds on the next candle producing only about 10 pips but subsequent candles send the trade in reverse.
This pattern was not on the BB.

The picture is fine - and thanks for the magnification!! :slight_smile:

Again, Iā€™m making a lot of assumptions, but I also have to be realistic in that I will probably never get the best possible entry. As I said, this one worked out, but Iā€™ve had many go against me, and we would have to successfully scalp three more setups just to get above even.

My KC intermediate method 5 min chart entry will do significantly better but even then a certain amount of skill is required and perfect entries cannot be guarenteed.

In our search for a good risk/reward ratio and, therefore, a better trading tatic, we will need to let our profits [U]run [/U]but [U]limit [/U]our losses.

That is, we will need to :

  1. Revise the stop loss position. We may need to set it earlier and thus lose more of our trades but lose them at less pips. In fact we may need to set a rigid stop loss with a predetermined number of pips.

Research on the longer term trades shows that this tactic dramatically improves profitability.

  1. Let our profits run but only to a certain point. Again, research shows that a [U]loose [/U]profit target can be improved on greatly by setting a [U]fixed [/U]profit target.

My computing knowledge is recent and I do not have the skills to do backtesting.

Also I do not think that the GFT program provides for backtesting. Correct me if I am wrong!

So it would be interesting if a reader with the relevant skills could backtest say EUR/USD with the following parameters.

Pattern=evening star.
Profit target=30 pips. Timeframe=20 minutes. Entry at market or open of 4th candle.

a) stop loss set at 30 pips
b) stop loss set at 20 pips
c) stop loss set at 10 pips
d) stop loss set at 5 pips.

Total number of trades to be tested to be given.
Results in % of winners to losers.

[B]I can provide a computer code/program if you need one.[/B]

343

To Vulcan Classic ;

Looks like you have finally decided on the GFT platform.

I like 4 charts per screen but will tolerate 5 (no other choice!)

I guess you can set it up two different ways -

  1. all pairs on 20min on one screen/workspace.
    all pairs on 25min on one screen/workspace.
    all pairs on 30 min on one screen/workspace.
    etcā€¦to 9 screens/workspaces.

    [B] or[/B]

  2. The way I have set it up with each workspace showing a range of timeframes for only one pair.
    Then 2 workspaces cover all the timeframes for that pair andā€¦
    9 workspaces cover all the pairs.

I think I prefer the 2nd method because if I spot a pattern then I can see
quickly what is happening in the timeframes on each side of it.

344

Yes. That was EURUSD 30 minute. Thank you for the guidance on the candlestick formation. I only like to trade EURUSD because the spread is so low and most other currencies move pretty much in tandem or exact reverse of it.
My backtesting (if you can call it that) where I counted the win-loss ratio was done manually. I have [I]some[/I] [B]very[/B] limited skills in making Expert Advisors in Metatrader, but I donā€™t think these can be set up to recognize candlesticks. The inputs for the advisor are very discrete and usually rely on [I]indicator X[/I] reaching [I]measurement Y[/I]. Candlestick formations have too much subjectivity in their recognition.
It seems like I read about someone (maybe earlier on this thread) talking about a program or indicator that recognized candlestick formations. I think they said it was crap though. Iā€™ll see if I can dig into this. My guess is itā€™s got to be done the old fashioned way.

345

InterbankFX has a free candletick pattern ea alert. I have not used it or know of how well the quality of it is. Just sharing in case someone wanted to give it a look.

One more thing about risking more than making. The way I trade on ranges by building positions I find myself to be forced to do this. I wonā€™t complain because it is working just fine for me. The risk is justified by the win/loss ratio. I hardly ever lose. The downside is a loss will blow out 2 or 3 wins. I have never shared this because I just knew if I did that I would get mm flames flying left and right. Maybe having a system with a good win / lose ratio and risk / reward ratio is trying to have your cake and eat it too.