THE JOY OF CANDLESTICK TRADING - Part 2

Beginner Questions
266

[B]To Flossnhoss : re the charts.[/B]

[U]Comments[/U]

Congratulations!! :slight_smile:

Those charts of yours (clearly Dealbook charts), are the [U]best charts[/U] I have seen posted by a reader on this thread and also the previous thread.

They are large charts taking up all the allowed forum space, well magnified and well labelled.
This is definitely the way to go and shows that you are thinking very clearly indeed!! :slight_smile:

The candlestick pattern on the main chart is a somewhat dangerous choice for going long.
[U]Note that the trend of the price action combined with the Bollinger bands is all going down.[/U]

When you have a trend like that, a reversal candlestick pattern usually only stalls price action for a while.
It takes the appearance of a second reversal candlestick pattern to actually change the direction of the trend.

To this end I must draw your attention to this hyperlink with regard to the [U]section on the correct use of the Bollinger bands.[/U]ā€¦

http://forums.babypips.com/newbie-island/18016-most-important-post-joy-candlestick-trading.html#post75769

Your entries and exits are spot on!!

However, after entry 1, you really should not do another entry until you have made exit 1.
Otherwise you will violate your money management.
Also, your PCI stop loss will have to cope with 2 entries and 2 potential losses each with different pips.
Very confusing for money management.

So keep it simple.

Your entry 2, then, would have been at the red candle on the lower 0.7 line near price 1.2390

Your exit 2 would be at the first green candle on the upper Starc 1.0 line near 1.2410

I know the second green candle near price 1.2420 gives a better exit, [U]but we do have to stick to our trading plan rules!![/U] :slight_smile:

Keep up the fantastic work!!
Soldier on!! :slight_smile:

267

In my post #255 page 26, I showed an evening star trade (going short),
with a powerful uptrend and with the Bollinger bands also going powerfully up.
The trade was a success.

The previous post by [B]Flossnhoss [/B]was of a similar nature and I cautioned against it even though it was a success.

It would appear that I am a hypocrite or contradicting myself.

Not so.

The fact is that the [B]Advanced level Candlestick trading method[/B] is very powerful.
[B]
Powerful enough to win a trade when no other method will.[/B]

[B]Powerful enough to trade short when the trend is obviously very long.[/B]

[B]However, we need caution in such radical trades!![/B] :eek: :eek: :wink: :wink:

Although we may get away with a win in such cases, [U]we should not make this the norm in our trading.[/U]

Yes, the Advanced level may forgive our ignorance and give us a win,ā€¦ [U]but it is much better[/U] to examine the followingā€¦

  1. Is the candlestick pattern correctly formed?
  2. Is the candlestick pattern on the upper/lower BB?
  3. Are we using the Bollinger bands correctly to discern the likely trade direction?
  4. We then look at the trend direction - are we fighting a trend?
  5. Are there any support/resitance lines at our candlestick position that would verify our intended trade direction?

[B]If these conditions are correctly met, then we can trade with confidence.[/B]

268

Tymen, thank you for your continued responses.

I think Iā€™m really getting some good feedback from you that is helping to better align your system within myself. :slight_smile:

You make a fine point about the direction of the BBs, and itā€™s just yet another one of the many things one needs to consider and interpret prior to making a trade.

Iā€™m glad to hear my questions, and charts, and being helpful. I will try to continue posting questions and examples as part of my own learning that I donā€™t mind sharing here.

A few other thoughts on how I think I may be able to help the discussion here:
[B]

  • ā€˜Pips firstā€™ example :[/B] I think you already mostly cleared this up in your last post. Your suggestion to enter trade when it hits the 0.7 STARC makes it pretty clear as to when you shouldnā€™t wait any longer for a retrace to occur. Iā€™m thinking the STARC trend in relation to the BB may also be something to consider for this. Regardless, I think one example would be interesting to look at.

[B]- Losing trade example(s) :[/B] We all know they happen, and will continue to happenā€¦ hopefully at a decreasing rate :slight_smile: . Being very new at this, Iā€™m learning that one of the most (or perhaps THE most) important aspects of trading is having the right emotional mindset while trading. Nobody likes to lose, but I think posting some examples of losing trades may help show that it does happein, it is okay for it to happen, and what lessons can be learned from a losing trade when it inevitably does happen. It may also help to develop the proper culture of turning what may be perceived as a bad situation, into a better one. The proverbial sliver lining.

[B]- A ā€˜yes/noā€™ flowchart :[/B] This is an idea Iā€™ve been kicking around for myself to put together. Mostly as an exercise to get my mind set on a method, and remove any emotion from trading. It would take a while to develop (I have lots of time!), and I also think it could be a nice supplement to this method (or really any method). For example, it would be a visual chart with questions such as: Is the candlestick pattern fully formed (yes/no). If yes, go to next question, If no, wait for pattern to develop. And so onā€¦

These are just a few ideas Iā€™m having right now, and I donā€™t mean to imply they [U]have [/U] to be done, or even will be doneā€¦ just throwing them out there for discussion! :smiley:

Tymen, I think you have a good teaching style, and I donā€™t want to slow down your progress with my goofy ideas.

269

Tymen, I have to say that the point about support/resistance has not been mentioned enough. Looking only at the 20-60M charts without giving any attention to the bigger picture (major support and resistance lines) can really break your trade. Go on, ask me how I know.

Questions:
[ol]
[li]You mentioned about trend following system with the band crossover as a signal. How does this come into play with your new rules?
[/li][li]You posted a chart with a ā€œfear regionā€ highlighted. If I were to follow your rules, then shouldnā€™t there be no fear at all? The Starc band at the entry candle (which crossed the 0.7 line) is heading down, and thereā€™s no way we could have known that the Starc band afterward would be heading up. After all we donā€™t care about the direction of the Starc band anymore, right?
[/li][/ol]

Thanks a lot.

270

Yeah?
When?

I am still looking for one.

If I find one, I will post it!! :smiley: :smiley: :smiley:

[B]- A ā€˜yes/noā€™ flowchart :[/B]

That is a little basic really.

What shall we state?

Open main chart - find candlestick pattern and determine trade direction.
Open 5 minute chart.
Select correct 0.7 line in accordance with trade direction.
Enter on 0.7 line when price crosses this line.
Exit when price crosses opposite 1.0 line.

Hope this helps.

271

I am going to firmly disagree with you [B]Trem[/B].

[B]First point.[/B]

It is important that we do not confuse indicator trading procedure with candlestick trading procedure.
The two trading methods are quite different.
In my next pdf final version I shall include a section on candlestick trading method to highlight the differences.
[U]It takes a little getting used to the different mindset to be used.[/U]

[B]Second point.[/B]

Indicators only give you a mathematical manipulation of a series of closes. The indicator knows nothing of what happened in between the closes.
Hence the need for the ā€œbigger pictureā€ as you say (longer timeframes) to get a better understanding of what is going on.

On the other hand candlesticks give you a complete picture of what is going on immediately because no data is omitted.
The particular pattern on a chart will tell you immediately what to do.
If you looked at a longer timeframe, you would get confusion because the candlestick patterns are for the timeframe in question.

[U]So multiple timeframes are for indicator traders.[/U]

The candlestick pattern tell you what to do for the next approx 4/5 candles on its own chart.
You do not need to look at another timeframe.

[B]Third point.[/B]

The s/r lines may tell you one of two things - a breakout possible or a bounce back.
Now which one will it be?
You really donā€™t know.

So I would say that s/r lines, when they appear at the candlestick pattern, trade with added confidenceā€¦but if they are not there, do not worry.

My last few examples here all traded with success, yet none of them was associated with a s/r line.
Further, up till now, I have never use s/r lines at all, except to set a target profit in the Basic/Intermediate levels.

I think that examining the trend and the BB are more important.
From these you can guage the likely success of your candlestick pattern.

[B]Final point.[/B]

When I started to design a quality candlestick trading method back in February 2008, the main parameter was to get pip efficiency/unit time.

That is, the maximum number of pips for any length of time.

This does not work in very short time frames (1/5 minutes - not to be confused with the starc bands) where the reliability of the patterns is in question.
On long timeframes (daily/4 hour), there are a lot of oscillations within any particular candle. We are looking for pips, not oscillations.

[U]Hence the timeframes selected.[/U]

But those timeframes, together with their respective candlestick patterns, are stand-alone operations, and do not need confirmation from other timeframes or s/r lines as is the need in indicator trading.
I find that my win/loss ratio is not affected in any way by the presence or absence of s/r lines.

[B]Now to the next part of your question - next post.[/B]

272

[/li]
The band crossover tells you that the current trend within the starc bands is finished and the trend will now go in the opposite direction.

This is great to know if you have, say, been trading short and you are on a starc band roll downhill.
You are then collecting heaps of pips.
But you do have to know when to stop and exit!! :smiley:

You posted a chart with a ā€œfear regionā€ highlighted. If I were to follow your rules, then shouldnā€™t there be no fear at all? The Starc band at the entry candle (which crossed the 0.7 line) is heading down, and thereā€™s no way we could have known that the Starc band afterward would be heading up. After all we donā€™t care about the direction of the Starc band anymore, right?
[/ol]

Yes, there is a fear region.
If all goes according to plan, then indeed, there is nothing to worry about.

But what about if the trade backfires and the price action proceeds to your PCI stop loss?
The ā€œfear regionā€ is the most likely area for this to happen because it is in this region where the price action is retracing in the direction of your stoploss.

Outside this fear region, the price action direction is going away from your stop loss so there is nothing to worry about.

273

Ha! Glad to see such confidence in the method. Perhaps once it is mastered, losing trades are far and few between. :smiley:

Good deal, I will try to keep this as simple as possible for myself!

Thanks

274

Thank you for your insightful responses.

I am however still a bit confused, as Steve Nison himself feels quite strongly about the relevance of S/R lines to the candle patterns. What am I missing Tymen? Thanks again.

275

You are not missing anything.

If you wish to use s/r lines as a guidance to whether you enter a trade or not, that is your choice.

But I think you will find that the majority of good patterns that do work will not be associated with any s/r lines.

Again I say that an s/r line can mean either a breakthro or a bounce back.
We cannot tell in advance which one.

I have personally found that the Bollinger bands and general trend observation to be a reliable as you need.
I feel that it is probably a good sign if s/r lines are present but I do not negate a trade just because they are not there.
To me, they appear to play a minor role in determining a trades likely performance.

[B]To please you, I will keep on the lookout for a candlestick pattern trade with s/r lines and if I see one, I will post the full trade here.[/B] :slight_smile: :slight_smile:

276

That would be really cool Tymen. :cool:

I think Iā€™m catching on. Am I right in saying that since we have two probability bands on our side (plus the candle pattern), our prediction accuracy (edge) is already good enough that we simply can live without giving any regard to S/R lines?

277

The mass of live trades, Basic, Intermediate and Advanced which I posted from page 170 onwards in the first candlestick thread, all of which were successful, were done without attention to the s/r lines.

But that is not to say ignore them, or else I would not bring the subject up.

If there is such a line at the candlestick pattern, it may well increase the probability of the trade being successful.

[B]To answer your question directlyā€¦[/B]

Yes, I think we already have enough material to be able to make a good forcast as to whether our pattern will work.

Remember also, that the multiple trading strategy of the Basic/Intermediate levels and the Starc bands of the Advanced level, give us the ability to take only 10 pips from a trade.

[U]There are times when all the pattern gives us is 10 pips.[/U]

After that, the price action continues on its original path.

This small deviation is hardly enough to warrant an s/r line where major action is indicated.
[U]Yet the candlestick method is efficient enough to be able to pull pips out of this same small deviation and give us a profit.[/U]

[B]In summary then[/B]ā€¦

ā€¦ s/r lines appear at major trend changes.
But many of our profits may come from smaller deviations in price action where an s/r line would never appear.

278

A very fine answer. Much kudos to you Tymen.

279

[B]Here is another interesting trade done with the Advanced level [/B] >>>


By tymen1 at 2009-04-07

In this 30 minute main chart of GBP/JPY we see a dark cloud cover with a rising Bollinger band.
The correct use of the Bollinger bands states that we would not trade this patten because all that happens is that the price action goes level for a while before rising again.
A second short pattern is needed for the price action to go down.

So here we see the price action going level.
Can we at least get some pips out of this one before the price action resumes its original course?

[B]Lets see what happens in the 5 minute starc band chartā€¦[/B]

280

[B]The 5 minute chart of GBP/JPY [/B] >>>


By tymen1 at 2009-04-07

The entry candle is shown.
It takes about an hour (each candle is 5 minutes) before the price action hits the upper 0.7 band which is the signal to enter short.

Another hour passes before the lower 1.0 Starc band is finally touched.

And yes, the difference is 25 pips.

Ah, yes, we should take out the spread, which in the case of GBP/JPY is a horrible 6 pips!!

So that leaves us a profit of [B]19 pips done in 2 hours.[/B]

[B]However, this is an extreme trade example to again show that the Advanced level will get blood out of a stone. :smiley: :wink:
This trade gives us confidence that when we trade with ordinary examples, we can expect a lot more pips.[/B]

281

Hi Tymen, correct me if Iā€™m wrong but I guess this trade is a no no since bollingers are going up right? We canā€™t know for sure that the price is going sideways before it resumes up, it can go up right away after the pattern was formed.

Thatā€™s my two cents.

Regards.

282

With the BB going up, and price action walking the upper BBā€¦
ā€¦what we can know for sure is that a [U]shorting candlestick pattern[/U] has a very high probability of levelling the price action for a period before it resumes going up.

How long this period will be we do not know.

It could be just one candle or it could be several candles.

A second strong shorting pattern will send the price action down.

[B]In the next post I will explain the proper use of the Bollinger Bands.[/B]

283

[B][U]THE CORRECT USE OF THE BOLLINGER BANDS[/U][/B]

I will now explain the correct use of the Bollinger bands.

We only trade the candlestick patterns when they are placed on the upper or lower Bollinger bands.

These bands mark an extreme point, and prices at these extremes are more likely to return to the centre, that is the mid Bollinger band.

By choosing a shorting candlestick pattern on the upper Bollinger we combine 2 powerful signals, that of the pattern and the extreme of the price.
The same is true a long candlestick pattern on the lower Bollinger.

When prices are at the extreme of the Bollinger bands, the price action is much more likely to go only one way, that is, into the centre.
We know that when a candlestick pattern appears, it indicates that price action is about to go in one particular direction.

By now observing the appropriate candlestick patterns on the Bollinger bands, we greatly amplify the probability of the price action going in the direction dictated by the patterns.

Examine the following diagram which shows the Bollinger bands (blue lines) expanding >>>


By tymen4 at 2008-11-05

There are 2 candlestick patterns on the drawing ļæ½ red is a shorting pattern and green is a pattern for going long.

The green and red lines show the relevant price action.
Note how the patterns break the trend of the price action only slightly.
A few candles later and the price action resumes it original direction.

This diagram then, sho[U]ws incorrect use of the Bollinger bands[/U] in determining a trade.

284

[B][U]Bollinger Bands (continued)[/U][/B]

Here is now what happens when 2 short or long patterns appear in sequence >>>


By tymen4 at 2008-11-08

After the second pattern, the price action goes the correct way the pattern dictates.

Therefore, if you see a second pattern on an expanding Bollinger band, you can expect a successful trade after this pattern.
But with one pattern only, your chances of making big profits are very limited - small profits at bestā€¦

285

Would it be more reliable if we wait for the second pattern?