THE JOY OF CANDLESTICK TRADING - a Learning Experience

Beginner Questions
406

[B]Now we cut this daily chart to an even shorter time frame - the 1 hour chart.[/B]

This is long by the short term trading standards!! :smiley:


By tymen1 at 2008-04-29

In this chart we have the stochastic again.

The [U]short [/U]entry is shown by the black vertical line and a series of alphabet letters is shown from A to F.

[U]Let us look at a hypothetical trade.[/U]

In this chart we are able to pick some ā€œlegsā€ in our trade.

From entry to A is a downward leg. We could exit our trade here.

A to B is a [U]retrace [/U]- enter again at B.

B to C is a nice run. Exit at C.

C to D is a [U]retrace [/U]again. Re-enter at D and go down to E.

Nice trading? Look at the retraces on the chart. They carry many pips. Had we used this method we would have been very successful.

[U]But is it that easy?[/U]

Look at the A to B retrace. An exit at A. Right on A? How do we know this is the bottom?
And what about the retracement top. Do you really think we can pick that point perfectly every time. Easy to see in hindsight. But just try it in live trading - nearly impossible!! :eek:

The Bolinger and Keltner (not shown for clarity) give no answers either. The stochastic can only tell you [U]after [/U]the price rises.

So to answer this question we find that we are [U]top and bottom fishing[/U] to find the best exits and the very tops of the retraces. Top and bottom fishing is a NO NO in trading. It is fraught with danger and you will always get it wrong.

The A to B retrace is 37 pips. With great skill, you will lose 11 and 12 pips respectively in finding the exit and the very top again. Plus you subtract 3 pips for an extra re-entry.
So your 37 pip gain is reduced to 11 pips and that with much labour and great skill. Worse if you are not so skilled, and that is most of us.

For exactly the same reasons, the C to D retrace of 56 pips is reduced to only 12 pips.

All this exiting and re-entering is hardly worth the trouble then it seems. Even though on a retrace there is [U]no trade[/U] and you really donā€™t care what happens during that period.
[B]
We will research this question further in the next post.[/B]

407

[B]Have a look at this 4 hour chart[/B] >>>


By tymen1 at 2008-05-01

In this chart we see an evening star in the middle of the picture right on the BB. In this one the 1st green candle has risen far too fast and the red candle is far too short but since the lower BB is flat and the upper BB with a bend in it after the 2nd candle, we will consider it anyway.

The 4th candle is the first trade candle. It is a red candle telling us that the price went down after short entry butā€¦

what a small candle!! If we enter with 2 lots, do we exit with one lot at the bottom of this candle?
Assuming we could find the [U]exact bottom [/U]of this candle, how many pips do we make on exiting the 1st lot?..about 7 pips minus 3 for spread=4pips!!

Now what good is that? What great thing will that do for us? Nothing really. I think we would be better off staying in the trade with 2 lots !

The next candle (green) begins a [U]retrace [/U]which continues with the candle after that.

Looking carefully at the [U]smaller time frame [/U]chart shows that it is [U]not possible [/U]to properly detect the low point of the 4th candle (entry candle).
With the Bolinger bandā€¦NO
The Keltner channelā€¦Nope
The Starc bandsā€¦Nope
The Stochastic thenā€¦No again!

In that case, it is better to stay in the trade with 2 lots.

However, it is reasonably easy to spot the retrace top in a [U]smaller time frame [/U]chart with the above indicators.
The best is the upper Starc band followed by the upper Keltner set at period 4, factor 1.
The upper Bolinger band also comes to great assistance here.
Last is the Stochastic which shows the top [U]after [/U]it has occurred.

Knowing this allows us to add a 2nd lot near the top of a retrace if we enter with only one lot. (same as allocating half our trade to start with).

[B]This knowledge from this chart, together with the observations from the last post allows us to come to some definite conclusions next post.[/B]

408

Tymen1 your posts are excellent as always, and has encouraged me to continue learning about candlesticks, i recently purchased one of Steve Nisonā€™s books on candlesticks and i look forward to reading it. :wink:
I look forward to your next post, and i need to read up on Starc bands.

409

Thanks Greywolf238.

I am sure you will find Steve Nisonā€™s book on candlesticks very interesting and informative.

Starc bands are almost identical in position and shape when compared to Keltner bands set a period 4.

They are very useful for estimating immediate tops and bottoms since nearly all the price action remains within the bands.

Suggest you colour the Keltner bands in orange and the Starc bands in green. These are very opposite colours and will help you tell the difference.

410

[B]Before I consider some conclusions, I must attend to two matters.[/B]

The first concerns an [U]error [/U]that I made in post #391 thus :

Therefore, the idea of [U]shifting the stop loss[/U] to the entry/opening is [U]not a good 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.

[B]To correct [/B]:

The 2nd lot indeed [U]does [/U]return to zero profit but [U]not [/U]into the negative. Why - because we have shifted the stop loss to the entry/opening and this means that the 2nd lot reduces to zero then [U]closes the trade[/U] upon [U]hitting the stop loss.[/U]

We are left with the profit on the 1st lot.

But going thro the entry reduces our 1st lot profit to almost nothing.

This statement is now completely in error. [B]To correct[/B] (and repeat myself) - the 2nd lot [U]hits the entry [/U]and[U] closes the trade [/U]because we have [U]shifted[/U] our stop loss to that point.

Now the second matter :

To quote from the hyperlink I gave to read :

Therefore, when the first lot meets its first objective, the second lotļæ½s stop is moved up to break even which locks in the gain and guarantees that profit. ā€¦
When the first target has been met, the worst that can happen from that point on is the second lot retraces to the breakeven point and the trade is closed out for the net profit on the first lot.

The problem here is to ask : ā€œwhere is this first target?ā€

If we were to consider the previous trade, it would be only 4 pips! :eek: :eek:

As we see in our trades, the price action may go [U]long first, before [/U]it goes short!! What then?

I think we have to establish that it is [U]not possible to know [/U]whether the price will go up or down immediately after short entry. The stochastic will only tell you the [U]close [/U]and take no account of the full action within the candle.

It is better, I think, to set a [U]short target [/U]for our first lot. Price action may well go up considerably before it goes down - even close to our stop loss.
To set a target is better because we then do not have to worry about [U]bottom fishing.[/U] .
In the hyperlink example, the target and stop loss were the same but this is not always possible.This target may well be [U]less [/U]in pips than our stop loss because of the shape of the evening star pattern.

[B]I therefore, propose the following conclusions and a diagram to give clarity to the conclusions - next post.[/B]

411

[B]Now at last, after all these posts, the conclusions :[/B]

  1. We must search for [U]quality patterns[/U] on the Bolinger bands to have a reliable trade. With poor patterns anything could happen.

  2. The Bolinger band must not be ā€œtrumpetingā€ but rather, be mild in rising or level or even falling. Trading evening stars on a trumpeting BB is fraught with danger. This is the place to trade [U]3 green soldiers[/U] (long) or[U] 3 red crows.[/U] (short).

  3. We set the stop loss according to the above 2 conditions, be it large, medium or low risk.

  4. We trade 2 lots to give a superior win/loss ratio.

  5. We enter using a short term Keltner chart with a MACD and Bolinger band to get the best entry. The best entry is often the opening price but not always. This short term chart is about 1/4 of the length of the main chart.

  6. We choose target profits rather than bottom and top fishing.

  7. We do not know whether the price action will go up or down immediately after entering. Therfore the diagram below is proposed to get the maximum out of every trade increasing our win/loss ratio and also improving our risk/reward ratio.

[B]This diagram is the result of all the considerations of the trades posted so far as well as the material in the hyperlink I gave to read.[/B]

The diagram - notes below >>>


By tymen1 at 2008-05-02

This diagram shows 2 separate drawings with a short entry at the bottom of a red candle (evening star).

The stop loss is placed above the candle and two target profit lines are placed, the 1st close by, the 2nd looks for larger profit.
In short term trading, these may be say 7 pips and 25 pips respectively. The choice is yours.

Since we do not know which way the price action will go first, we enter with just 1 lot in both cases.

[B]The 1st drawing[/B] shows a short entry of [U]1 lot [/U]that makes it way to the 1st target profit where the trade is automatically closed by the computer. (leg 1)

The trade goes a little further down then right up to a retrace. But at this stage you really do not care what it does because you are [U]not in the trade[/U] and there is [U]no stop loss active[/U]. (leg 2)

Then using the Starc or Keltner channels, together with the BB we re-enter short [U]2 lots[/U] at what we believe is near or at the top of the retrace.
We wait for the trade to eventually close out at the larger 2nd profit target.
(leg 3)

If this second entry goes haywire by hitting the stop loss instead, then we have a loss from the 2 lots. But this loss is small because the pip distance from the second entry to the stop loss line is small. Now the 1st entry has a longer pip distance to its target profit.
So the two tend to cancel each other outā€¦2 lots, few pips -ve versus 1 lot many pips +ve. (riskless or nearly riskless trade).

[B]The 2nd drawing [/B]shows a short entry of [U]1 lot[/U] with the price action going against us and doing a [U]retrace first.[/U] (leg 1) :eek: :mad:

As before, we attempt to find the top or close to top of this retrace and then add our 2nd lot.
The computer averages our entry.
We then hope that our trade marches to the 2nd larger profit target with the 2 lots (leg 2)

At this point we could set a [U]target 1 for one lot[/U] as an alternative. The pip profit from this is from the word ā€œaveragedā€ to the light green line in the diagram. We perservere with the 2nd lot trusting it will hit target 2.

[B]Next post.[/B]

412

[B]So here concludes the first section on my thoughts onā€¦ THE JOY OF CANDLESTICK TRADING - a Learning Experience.[/B]

I am very interested to receive comments about the trading options 1+2 above. Given all the variables that we encounter in our candlestick trading, I think that the above approach is the best of all worlds.

[B]But if you can see better options, please post and let us know.

Also questions, please.[/B]

After here, term break. (typical school teacher!)
The work has been exhausting and I need to re-group.

Starting again, I intend to improve on the stop loss giving an ultimate risk/reward ratio that is pleasing to all and gives us a powerful winning edge.

I will go thro examples of the above approach to measure our risk/reward and win/loss ratios. Both of these will be put firmly in our favour.

Then it is time to start looking in detail at other candlestick patterns such as the [U]engulfing pattern[/U] and [U]dark cloud.[/U]

We will, for the first time, also look at long trades, with [U]doji stars[/U] and [U]three [/U][U]inside/outside up[/U] patterns.

The best method for entering long trades will be considered.

A lot of work is ahead.
I hope and trust that readers have gained something from the posts on this thread to date.

Remember - candlesticks are the best form of trading!! :slight_smile:

[B]Good trading to all!![/B] :slight_smile: :slight_smile: :slight_smile:

413

Tymen ; Your teaching is of the highesty quality and greatlly apreciated by many I am sure. The last couple of post can help us all increase our accounts bottom lines. I wish you well in your break and wait for your next installmentā€¦

                                                            Take care Ken :D
414

i m sure we all appreciate what tymen is doing for us. great teacher with excellent teaching qualities. for me tymen has been the best teacher so far. we owe u big time tymen. huge thnaks.

goood trading.

415

sorry guys if this question is out of topic.

does anybody know which of steve nisonā€™s book on candlestick is the best?
i believe he has more than few so if somebody has had a go with them, ur advice will be very helpfull.

which one would u recommend tymen.

thanks

416

Tymen,

Iā€™ve been away due to work and such, didnā€™t get to my screen all last week. Seems like longer than that.

I just got caught up on the thread, good job!!

Very interesting addition to the stategy, is this also known as scaling in?

Looking forward to trying it.

417

Hi there Tymen,
Thank you so much for sharing your trading strategies. Your teaching methods are phenomenal. I have been experimenting with different systems and indicators for a while now but candlestick trading has the best approach IMO. Iā€™ve always had better trades when reading candlesticks but never stuck to it cozā€™ i had that believe that indicators provided a more robust system. :confused: Itā€™s thanks to you that i now have the confidence to adopt this method. :smiley: Thankā€™s for teaching us all and i canā€™t wait for you to start on other reversal patterns like the dark cloud covers and etcā€¦

Kelvin :smiley:

418

Thanks Tymen for your time & effort with the daily, 4hr & 1hr EURUSD candlestick charts. I will continue experimenting and keep you posted. I look forward to the following approaches with doji etcā€¦

419

what do flat BB lines tell you? What does one flat and one curved indicate?

420

First of all, I just want to thank you Tymen for the great thread you have started and the wealth of information youā€™re sharing with us! I do have a few questions for you if you wouldnā€™t mind answering.

Iā€™ve been using GFTā€™s Dealbook 360 per your recommendation and I was wondering what are your settings for the MACD, Bollinger Band and the Keltner Channel?

I currently have the MACD set to:
Price: Close
First Period: 12.00
Second Period: 26.00
Signal Period: 9.00

The Bollinger Band setting is:
Price: Close
Period: 20.00
Deviations: 2.00
Displacement: 0.00

Keltner Channel is set to:
Period: 5.00
Factor: 1.00

Iā€™m using the M25 and M5 charts as well. Are there anything I should change in regard to the settings and the time frame for the charts? Thank you again Tymen!

Cheers,
Bill Clinton

421

Tymen, this has to be one of the most detailed tutorials Iā€™ve ever seen. The amount of effort you put into this thread must have been enormous.

Thank you for the step by step lessons you provided for us newbies, and I look forward to learning more from you in this thread in the future.

Cheers.

422

Hello Tymen,
I found this thread from Hussin Jaji/Iran on:
Have a close look at it. You may like it as an additional approach?
A geat week-end and bestā€¦ from Bern
I will be out of station till june 9th: trip to Thailand, Italy

423

Bill
If you look at page 35 post 76 from tymen1, the settings are posted there. :wink:

424

[B]Welcome to Term 2 of this thread :
THE JOY OF CANDLESTICK TRADING - a Learning Experience[/B]

I really needed the break and now it is time to restart.

This term will see improved charts with the explanations.

Further work on establising the risk/reward ratio will be undertaken with a view to setting this finally in concrete.
To enable this we will look more closely at money management strategies especially when trades go wrong.
A general all encompassing strategy will be developed to allow trading under all conditions with a favourable outcome.

Once these matters are settled we will then look at other candlestick patterns and transfer our new knowledge to trading them successfully.

425

First, all the posts since last term need to be answered:

To Yuv, Kelvin, Keitsuke, VulcanClassic and Bernbeach I say thank you indeed for the wonderful compliments. You do encourage me to keep going.