Hi everyone, I am new to this thread. I have read through all of Tymen’s posts so far and it all seems quite informative. Thank you Tymen for your input… I would like to possibly use certain aspects of your candlestick strategy to judge better entry points on other strategies.
I wanted to ask a question about the quote above… Tymen wrote that the ‘loss potential’ on that trade was 29pips and the reward was 58 pips… but to me it looks like he has calculated reward based on the 2 positions he opened (2 x 29pips = 58), and he only calculated loss potential on the first position opened.
Have I misunderstood/misread something there? Can Tymen or anyone explain this or elaborate on this for me please.
Also, it doesn’t look like he has included a stop loss for the second entry… or is the stop loss for this the same as the stop loss on the first entry? (I may have overlooked an explanation on the stoploss for a second entry in a previous post so apologies if I have!)
Thanks again for your input Tymen, as well as everyone else.
I’ll answer what i can, Tymen can correct me if i’m wrong.
It was based on 2 trades, after the first trade was taken, it made a small retrace, once that was done, (we hope ) and the trade continues in our favor, we reset the stop loss below the first entry minus the spread distance.
Basically the stoploss is moved to break even, that’s why he says it’s a riskless trade. The same S/L is for both entries.
Hope this helps.
Tymens posts are always chock full of info, and i always have to read them several times before it sticks…
I understnad that the trade becomes riskless after the stoploss is adjusted.
But between the 2nd entry and the stop loss adjustment, there is still risk being added. Is this not taken into account when the ‘risk:reward’ ratio is assesed?
What is the stoploss on the 2nd entry before it is adjusted? Is it the same as the stoploss of the 1st entry?
I just looked at Tymen’s post again and calculated the risk potential of the 2nd entry (if it’s stoploss is the same as the 1st entry), and it only adds 3 pips. That really isn’t a lot after all but it would still be helpful if someone could confirm what the stoploss of that second entry should of been.
Ok here are my answers to Tymen1’s homework.
Exercise 1 i would [U]not[/U] have taken it, it looks like an evening star pattern, and it is on the upper BB, but i prefer that the body of the 3rd candle be about half way down the first candle and not the wick. The BB are flaring too much.
Exercise 2 i might have taken that depending on a few other things, like were are the nearest S/R lines and what does the charts look like on other Tf’s. What’s the direction of the overall trend. The body really isn’t half way down the first candle. It is on the upper BB and there not flaring out as much as the first chart. If i did take it, i would be watching it closely.
The way i understand it is, after the 2nd entry, the original SL is still in place. Only after the retrace and after the trade has gone in our favor, he moves up the SL.
The risk/reward is calculated on both trades and not just on the first or just on the second, because after the SL is moved up it’s in place for both trades.
That’s the way he did it anyway.
My answer is I wouldn’t trade either. Simple reason being the fundamental criteria of an evening star is not met, i.e. the third candle does not close more than half way into the first candle.
[B]Though I am flat out with my legal work for my court case on Thursday, I will quickly answer your question.[/B]
Thank you for posting your question - it is these inputs that make the evolution of this risk/reward ratio problem solvable.
[B]To Greywolf238 :[/B]
Thank you for attempting to answer this question beforehand and hopefully save me the labour. You understand the matter well and have answered as best as you could!! Thanks again!!
No error here, the first short entry was for only 1 amount. The initial stop loss was set for this 1 amount at 51.
Short entry at 22.
Thus 51-22 = 29 pips.
At or near the retracement point of 48, we add a 2nd amount and the computer averages the entries to 35.
The stop loss remains at 51 [U]until we reset[/U] it at say 3/4 pips (spread distance) below the computer average of 35.
But between the 2nd entry and the stop loss adjustment, there is still risk being added. Is this not taken into account when the ‘risk:reward’ ratio is assesed?
What is the stoploss on the 2nd entry before it is adjusted? Is it the same as the stoploss of the 1st entry?
I just looked at Tymen’s post again and calculated the risk potential of the 2nd entry (if it’s stoploss is the same as the 1st entry), and it only adds 3 pips.
Now it could be argued that [U]until we reset the stoploss [/U]we have 2 amounts trading at short entry 35 and stoploss 51.
Then 51-35 = 16 pips and with 2 amounts this gives 32 pips which is 3 pips more than my calculated 29 pips risk.
[U]However, all this is academic[/U]. This is precisely why we have the Bollinger and Starc bands in place.
The retracement is by definition, just that. It is the top of the expected price action. [U]How do we know that??[/U]
Because we tag or pass thro the top BB and top Starc band. These are [U]complete extremes.[/U]
Because price action here is an extreme, we define this as a [U]retracement point.[/U]. Price action at this point is [U]extremely unlikely[/U] to go higher.
As such, we consider the probability of the price action to go still higher and hit the stop loss to be effectively negligible.
We can, therefore, enter the 2nd amount at the retracement point with confidence and consider that the price action will go no higher. In fact, it should now [U]go down[/U].
While this is happening, the stop loss remains inert. It could be considered a PCI stop loss.
Remember that a stop loss is really an academic thing unless it is actually hit.
As I posted earlier, the risk/reward ratio in these candlestick trades is not as straightforward as in ordinary trades. In an ordinary trade you set the stoploss and takeprofit to planned levels and you can switch off your computer if you like.
Your risk/reward ratio is calculated [U]beforehand [/U]by you, the trader.
But in these candlestick trades, the stoploss is set by the pattern and not by a planned level. Same to some degree with the takeprofit.
Hence the risk/reward ratio is only discovered [U]after [/U]the trade is finished.
All we can do is make sure that the risk/reward is in [U]our favour beforehand[/U] but the exact values remain unknown until the end of the trade. To accomplish this favour beforehand is the current subject in this thread.
From what I had learned from tymen1’s thread, here is my answer.
Exercise 1:
I will not trade this pattern. It is not an evening star. The close of the third candle is higher than the opening of the second candle.
Exercise 2:
I will also not trade this evening star pattern as tymen1 has always said trade quality pattern only. The close of the third candle is not more then half of the first candle.
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:
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.
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
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.
[U]Everybody was correct [/U]- we are indeed all learning which is excellent!
Lets have a look at how these exercises panned out.
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!
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[U] no no[/U] 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.
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.
[U]This thread by Topchess, who is a veteran on this forum, and whose wisdom I greatly respect[/U], shows how to easily trade 4 hour time frames using Heikin Ashi smoothed candles. This system is readily useable with the GFT program.
Here is a 1 hour [U]main chart [/U]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 !! :eek: :eek: :eek:
The prediction fails badly with the resultant vector going up and the price action going down.
[B][U]Never use the KC prediction method on your main charts.[/U][/B]
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.
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.
[U]But the price keeps going down![/U] 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!!
[U]So what do we do?[/U]
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. [U]This then becomes our exit point [/U]on a [U]pips first[/U] trade - [U]a tag or pass thro of the lower Starc band.[/U]
The upper wick of the long red candle is then a [U]retrace[/U]. It is probably identified by a tag or near tag of the upper Starc band. Here we would re-enter short with [U]2 amounts[/U]. This follows thro to the profits.
[B]These observations are a preliminary to evolving a revolutionary new trading approach which will bring in huge pips in these short timeframes!! [/B]
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…
Main chart.
5/10 min chart with MACD, BB and Keltner.
5/10 min chart with BB and Starc.
The main chart detects the pattern and monitors the trade.
The 2nd chart is used to get the best short entry.
The 3rd chart is used to progress thro the trade and toggles between it and the main chart.
[B]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.[/B]
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 >>>
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.
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.
) and the trade continues in our favor, we reset the stop loss below the first entry minus the spread distance.
