Trading every shooting star/hammer.
Risk to reward 2/1
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This is trading off a single-candlestick pattern, obviously so this has pros and cons -
Pro - entry can be made earlier at a more favourable price: the pattern appears on Day 1, entry is on Day 2
Con - probability of success is lower as less price action data is available
Neutral - more trades per year (good be pro or con)
Have a look at Thomas Bulkowski’s patternsite for details. He reckons the hammer has about a 60% win rate at predicting a bullish reversal, but a 3-day pattern the Morning Star has a 78% rate. He rates 60% as just acceptable: the Shooting Star scored 59% in his tests which he rates as effectively random.
Distance of travel after entry is another factor . You might demo this strategy before committing your life savings.
Also, Bulkowski may not have done his tests in the markets where you will be trading.
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Just don’t go looking for them on lower time frames, the D1 can/will give you a higher percentage of success. You can be whipsawed on the H1 or H4 time frames easily.
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Very interesting stats there! Do you have a link to them at all?
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I will bear that in mind thankyou and something that will hopefully become apparent during my backtesting.
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Just a word of caution on using candlestick patterns in forex. Monday-Friday the forex market trades continuously across various time zones, so a forex candlestick chart inherently does not show any gaps. Price at the close of one bar is usually the price at the open of the next bar.
Many candlestick patterns, when you apply their strict rules of identification, demand that there is a gap between a close and a subsequent open, and in forex this just doesn’t happen. The no-gap issue means most of the best candlestick patterns do not work effectively in forex.
From what I can see, this basically leaves a few patterns such as the hikkake, plus single-candlestick patterns like hammer and hanging man which are not in the top league of patterns anyway, as already explained.
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I would be trading candles only in support and resistance areas and would be fully backtesting and demoing before going live.
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