THE JOY OF CANDLESTICK TRADING - a Learning Experience

Beginner Questions
386

Here I am going to give an example of keeping your stop loss low and letting your trade run.

This has been an evolution process so far. We are trying to develop an excellent procedure for trading. Improvements will come as we go on.

In the following chart >>>


By tymen1 at 2008-04-23

A nice evening star has been spotted with the BB essentially flat on both the upper and the lower. Good prospects!!

So we plan a stop loss at the top of the red candle body (medium risk).(947)

A short entry of half our lots is made at 931 shown by the black vertical line.
The rest is added at 943 - [U]averaging 937[/U] which becomes our final short entry.

We let the trade run, [U]overcoming a hurdle /U shown by the green candle. The outcome is an exit at 891.
We stay in the trade until a [U]profit [/U]or a hit of the [U]stoploss [/U]- whichever comes first.
But at 891 we have run a very good profit and for safety ([U]donā€™t get greedy[/U]) we exit.

The differenceā€¦937-891=46 pipsā€¦a really good profit.
The stop loss distance is 947-937=10 pips.

Thus we have a risk/reward ratio of about 1:4 :slight_smile: :slight_smile:
Do you like that?

The win/lose ratio is very high - considering that the BB is favourable thus allowing us to lower the stop loss to medium position.

[B]This is a good trade. Lets look at the 5 min KC chart.[/B]

387

[B]The 5 minute KC chart[/B] >>>


By tymen1 at 2008-04-23

The chart shows a DiNapoli preferred MACD in the bottom half of the chart. The values for this are close to 9, 5, 17. But it does not make much difference which MACD you use.

I am working on evolving this entry method to eliminating the MACD. As you try to guage entry, it moves too much and you really do not know when to click the mouse!! :mad:

The BB and MACD vectors are shown at the entry line on the chart. The Keltner is shaded grey with the mid band in yellow.

A yellow highlighted oval shows the BB and MACD vectors together with the resultant which is going down slightly.
This means [U]best entry[/U] somewhere [U]below[/U] the yellow KC mid band and we snatch the entry at 931 - which was effectively at[U] market [/U]when the 4th candle of the evening star [U]opened.[/U]

The short entry was snatched with [U]half the allocated lots.[/U]

A short ride down with 3 red candles, then a pullback. We add the remaining lots when the price goes thro the upper Keltner band. The price may well go higher but this is a good place to add because it is an extreme.

So we [U]added [/U]at 943. The computer now [U]averages [/U]our short entry to 937. This is 10 pips lower than our stop loss at 947.

To cater for our stop loss distance we must set a [U]target profit [/U]of at least 10 pips, but preferably [U]greater[/U].

We let the trade drag on. As long as the stop loss is not hit, the trade is active and we watch as the profit pip count grows.

Resetting the stop loss to a lower point to lock in profits is [U]not a good idea[/U]. There is a [U]pullback [/U]coming within 2 pips of our stop loss. So lowering our stop loss would have seen us make a small profit of much fewer pips.

The risk is, of course, that the pullback will go thro our stop loss and destroy our profits with a loss.
But we did assess the trade [U]beforehand [/U]and placed our stoploss intelligently!! :stuck_out_tongue:

So we weather this one pullback, but not another since the price now roars down to 891. This is very satisfying and we exit while we can. :slight_smile:

[B]Tomorrow, I will not post.

In Australia it is ANZAC DAY - a war memorial day.
Although I am a Dutch citizen, I live in Australia and I will respect Australians with their ceremony.[/B]

388

great posts tymen. i have been waiting impatiently for post updates and i must say its well worth the wait. keep up the goood work. u r a great teacher. feels like i m learning from the best.
every update makes the system better and better. and now with the stop loss and risk/reward explained and sorted i dont think i will look anywhere else.

massssssssssive thanks tymen
good luck trading

389

Tymen, your efforts here have drastically improved my tradingā€“keep up the amazing work! :slight_smile:

The more you post and explain, the more pips I get each day :smiley:

As a side note: I have recently switched to using GFT, and I gotta recommend it to you guys! Great platform; I thought Iā€™d never like anything better than MT4 :cool:

390

Hi Tymenā€¦

391

thanks tymen1 for the useful links that youā€™ve posted hereā€¦iā€™ve been looking for candlestick behaviour for long timeā€¦finally i found very useful tips from youā€¦fyiā€¦iā€™m currently improvising the technique that one of the member in this forumā€¦basically he focusing on candlestick together with Stochastics indiā€¦

392

Thanks for the very kind compliments from Yuv, Kraven and Zess.

Now Bernbeach has asked me to like at longer term time frames and there are probably others who would like this too.

I will now turn to daily and 4 hour time frames but commit to my ongoing search to properly set up the risk/reward ratio.

In longer time frames such as the daily, we only have one choice of time frame - the daily.
As such, the number of charts is much more limited. You cannot just open a daily and instantly find an evening star or other candlestick pattern. You may have to wait several days for a pattern to appear.

Because of this candlestick charting on these time frames takes a different course. Trading is wanted immediately and therefore a whole chart is looked at going back 2 weeks or more.
As well as the candlesticks, trend lines are drawn. Support and resistance lines are added (both level and sloping) to discern where to place the stop loss and take profit orders.
In addition, a drop of Fibonacci may be added.

I will however, stick to the standard patterns for now. The advantage here is their certainty.

393

Tymen; Thanks for all the great Ideas and Information. I know you have spent a lot of time on all your post and it shows. Just wanted you to know we are here and listening.

                                                  Ken
394

Thanks KENNETH LEE.

To start this work, first we must look and carefully read the hyperlink below.

It is [U]essential [/U]that it be read and carefully understood. What I am going to post relates directly to this hyperlink and [U]nothing I say after here will make [/U][U]sense[/U] unless the hyperlink is read.

Here it is :

http://forums.babypips.com/analyst-arena/12562-using-multiple-lot-positions-improve-trading-fx.html

395

I am now going to consider what has been said in the hyperlink.

I have already discussed the halving of allocated trades and adding to them upon a retrace/pullback.

To trade 2 lots is effectively the same thing.

Note that in the given short trade on the hyperlink, the price action continued to go down and did [U]not retrace [/U]thro the initial starting point, ie the open of the 4th candle.

We, however, regularly experience price pullbacks right thro the opening and even come close to our stop loss!!

Therefore, the idea of [U]shifting the stop loss [/U]to the entry/opening is [U]not a good [/U][U]idea[/U]. The 2nd lot will not only return to zero profit but it will go into the negative thus taking away from the initial first lot profit. If the price returned only to the entry we would make a profit only on the first lot. [U]But going thro the entry reduces our 1st lot profit to almost nothing[/U].

But in nearly [U]every case[/U] the price retraces thro the short entry and goes long when we want it to go short.

We are, therefore, better off leaving the stop loss where it is and not moving it.

[B]There are then 3 separate senarios which are looked at in the next post.[/B]

396

I am now going to consider what has been said in the hyperlink.

I have already discussed the halving of allocated trades and adding to them upon a retrace/pullback.

To trade 2 lots is effectively the same thing.

Note that in the given short trade on the hyperlink, the price action continued to go down and did [U]not retrace [/U]thro the initial starting point, ie the open of the 4th candle.

We, however, regularly experience price pullbacks right thro the opening and even come close to our stop loss!!

Therefore, the idea of [U]shifting the stop loss [/U]to the entry/opening is [U]not a good [/U][U]idea[/U]. The 2nd lot will not only return to zero profit but it will go into the negative thus taking away from the initial first lot profit. If the price returned only to the entry we would make a profit only on the first lot. [U]But going thro the entry reduces our 1st lot profit to almost nothing[/U].

But in nearly [U]every case[/U] the price retraces thro the short entry and goes long when we want it to go short.

We are, therefore, better off leaving the stop loss where it is and not moving it.

[B]There are then 3 separate senarios which are looked at in the next post.[/B]

397

[B]Examine the following diagram :[/B] Notes below the diagram >>>


By tymen1 at 2008-04-29

There are 3 separate drawings showing 3 different short trading cases. A red candle is shown for each case and a red stop loss line is shown. The base is shown with a blue dashed line from which the short trades start.

There are 3 legs to each trade and each trade is opened with 2 lots.

[U]1st case[/U]

In this case 1 lot was closed at the end of the first leg thus giving a small profit. (say 10 pips).
The 2nd lot is dragged thro the pullback for no good reason. It accomplishes nothing and we simply have to wait until it goes down again to generate more profit.
It does this on the 3rd leg.

[U]2nd case[/U]

Same as before except that at the top of the 2nd leg [U]another lot is added[/U]. The computer averages the two lots and the new entry is lower down from the top but between the top and the blue line.
The price goes down on the 3rd leg but this time we profit with [U]2 lots instead of one.[/U]

[U]3rd case[/U]

In this case [U]both [/U]lots are exited at a very small profit (say 10 pips).
The pullback (shown in green) is totally risk free since there is [U]no trade[/U]!!
We then re-enter the pullback at the top with two lots again and it goes on to profit as before.

This 3rd case appears to have some real advantages. Both short legs were traded with 2 lots giving maximum profit.
The pullback was totally risk free since there was no trade at this time.

[B]But are these advantages real? And can they contribute to a better risk/reward?

We will find out as we now consider some longer term trades.[/B]

398

[B]Consider the evening star short trade below[/B] >>>


By tymen1 at 2008-04-29

This is a daily chart with a nice evening star setup. The upper Bolinger band is level telling us of a good trading opportunity. But the red candle of the star is not as long as it should be so we set the stop loss as shown.

The trade is entered [U]short [/U]with two lots at market (base of 3rd candle of evening star).

In this trade there is [U]no pullback [/U]thro the short entry. This will simplify matters in some of our considerations.

The exit could be anywhere near the end of the chart.

[B]Next post we look at 4 hour chart which is to be our Keltner entry chart.[/B]

399

Thanks Tymen for starting on to this medium term subject.
I am eager to know what I can learn. In addition, as you can see in my profile, I will tithe 10% of my earnings (after recuperating ļæ½3K losses first) to humanitarian causes. The first 10%, thanks to what succeeded from your teaching, I will send to a planetarian or human cause, Tymen, you support.

PS: Van oorsprong hollander (Schiedam) Ik woon nu sinds 1971 in Ottenburg, Belgļæ½e. Laten we hier iets goeds van maken. Ik kijk ernaar uit dat ik dit met succes kan toepassen, Tymen. Beste groet. Harry

400

Hi Tymen
I have two questions:

  1. what are is the days on eurousd daily chart morningstar: are these 22nd through 24th april?
  2. I enclose in word doc usdjpy daily chart: a real morningstar pattern?
    I look forward to receiving your replies. :wink:
    Have a good day
401

Bernbeach
The chart looks like itā€™s from the 2 to 24

If you are talking about the 3 candles i circled in yellow, then no that doesnā€™t look like a morning star to me. The third candleā€™s body is to short.
The rules for a morning star
The first bar is a large red candlestick located within a defined downtrend.
2. The second bar is a small-bodied candle (either red or white) that closes below the first red bar.
3. The last bar is a large white candle that opens above the middle candle and closes near the center of the first barā€™s body.

Morning Star.JPG700Ɨ564 53.2 KB

402

Thanks bernbeach. Yes I do speak, can read and write Dutch - I do understand this! :smiley: :smiley: :smiley: :smiley:

403

[B]There is an error in my reasoning in post #391.

Did you see it?[/B]

It will not affect the method of trading or our search for a good risk/reward ratio.

However, if you are an astute trader you should be able to find it.

I am interested in seeing who picked up the error.

404

Thanks to you Greywolf238 for anwering the question put by Bernbeach.

The chart is indeed from 2-24 April and the evening star is 21/22/23 April.

As for your chart :

It is difficult to discern your candles because there are such huge spaces between them.

But for a morning star, this one only just passes -greywolf238 is correct in what he says.

The morning star should also be at the bottom of a downward trend to be really effective. It then heralds the coming of a new uptrend.

405

[B]Now to continue our analysis of the daily evening star in the post above.[/B]

Here is a 4 hour chart with a Keltner channel.


By tymen1 at 2008-04-29

This chart shows a stochastic instead of a MACD. We will use a stochastic in the next chart to try to discern a truth.

In this chart the middle BB is basically level, the MACD was going down, hence the resultant was going slightly down giving a best entry just below the middle Keltner.

This is where the price was at the short entry (black line) and the short entry was at market (start of 4th candle) at 881.
[B]
Our KC entry method has now been superceded by using one lot (or half of our allocation) and adding the 2nd lot at the top of a retracement. This gives consistantly a better short entry.[/B]

The stochastic shows that the price is going down.