Constructing a candlestick trading plan

[Blu-Ray 10]

After a discussion in the General trade log section with Brownsfan, it was suggested by him to open a thread with regards to having a trading plan on candlesticks.

 

The discussion was along the lines of when or when not to take a candlestick pattern, eg. a bullish hammer is obviously better at a support level rather than in the middle of a range. So it would be good to get a discussion going about different candlesticks and how or when you would use them.

 

An example, of which is pondering me would be, if a bullish hammer appears at a strong resistance level, would that be taken as a long signal or would you just stand aside?

 

I'm relatively new to the candlestick analysis, since I scalp off tick charts, but even then if my system fires off a buy signal and a shooting star has just appeared then I'll pass on that trade, it's amazing how many bad trades it would keep me out of. That is what has whetted my appetite to delve further into this candlestick analysis.

 

 

Cheers

 

Blu-Ray

[brownsfan019 17]

Blu,

You bring up an excellent consideration when looking at using/adding candlestick analysis into your trading. This exercise will be MUCH easier with charts and examples. I think if you post some charts, along with your thought process, we can get a discussion going.

 

Here's the important thing - there is no right or wrong answer. There really isn't. In the end, all we do as traders is try to exploit an edge over and over again. So, what this really boils down to is how often do you see the hammer or whatever pattern in these particular areas and how often do they produce for you?

 

When you have some time, post a chart or two and we'll see what kind of response we get.

[Nick1984 10]

I'm a complete candlestick noob and I'll be following these discussions carefully. For me only reason I was using candles over any other type of chart was cause they looked prettier!

[brownsfan019 17]

Nick,

Even if you don't necessarily incorporate candlestick analysis into your trading plan, I would at least be aware of them and get a general understanding. I've read a number of blogs and such where the trader was not using candlesticks for entries, but would be aware of a pattern when it appeared and used it accordingly. For example - if you are long and see a shooting star appear, you may want to exit, move your stop, etc. b/c it's a sign of weakness.

[wrbtrader 10]

...An example, of which is pondering me would be, if a bullish hammer appears at a strong resistance level, would that be taken as a long signal or would you just stand aside?

Blu-Ray

 

Hi Blu-Ray,

 

It's extremely important for you that when asking questions about a particular price action situation to post a chart example that correlates with the question to prevent any misunderstandings.

 

I myself tend to not respond nor participate in discussions when charts aren't posted to support questions about specific price action associated with Japanese Candlestick Analysis because it too often leads to misunderstandings.

 

For example, this is how I interpreted your question.

 

Your talking about price rising up and above a existing resistance level to only drop back down to that resistance level that may be now acting like a support level along with the appearance of a Bullish Hammer pattern...

 

Correct???

 

Also, your use of the term strong resistance implies that the price action had tested that level on prior occasions and then retraced.

 

Thus, the retracement gave merit that it was a resistance level that got confirmed.

 

I myself can't answer that question unless I closely examine the price action that had risen and then drop to the resistance (support) level when the Bullish Hammer pattern appeared.

 

I can't imagine stepping aside unless you have some facts (stats) to support that's a time to ignore this bullish pattern.

[Blu-Ray 10]

Thanks Brownsfan and NihabaAshi, I'll post some charts and thoughts over the weekend.

[Nick1984 10]

Nick,

Even if you don't necessarily incorporate candlestick analysis into your trading plan, I would at least be aware of them and get a general understanding. I've read a number of blogs and such where the trader was not using candlesticks for entries, but would be aware of a pattern when it appeared and used it accordingly. For example - if you are long and see a shooting star appear, you may want to exit, move your stop, etc. b/c it's a sign of weakness.

 

I'm not too familiar with the names of these candles. Ask me what a shooting star is and I'll look to the sky and what a hammer is and I'll go to a tool shed hehe. But I do look at the candles and I do make decisions based on their shapes. I pay attention to the wicks and the "fatness" of a candle if that makes sense. If i see a fat candle then for me it means that in that particular time frame the move looks like its stronger (especially if its supported by good volume). If there is a long wick on either end of the candle to me that means that there was buying/selling pressure that rejected price from its high/low. I usually only look at the candles around pivot points

[Blu-Ray 10]

Here's some charts that happened today when my system fired off some signals, I'm trying to incorporate candlestick analysis to aid my decisions, but I'm not trading directly off candlestick analysis.

 

First off, I'm a newbie when it comes to candlestick analysis, so go easy on me;)

 

All charts are short term tick charts.

 

1st chart fired off a buy signal, but the two previous candles were trying to go higher but pushed down very fast in real time, then the signal was generated. I decided to step aside as although my system generated a buy signal, the candles were telling me otherwise.

 

 

 

2nd chart fired off a short signal but on that candle was also a dragonfly doji, so I passed on the trade, however would have turned out to be a winner.

 

 

3rd chart fired off a buy signal and also had the bonus of it being a hammer, I took the trade as it gave me extra confidence.

 

 

I think basically what I'm trying to say is that I'm starting to look at candlestick patterns to filter my trades, I'm still very new to this candlestick analysis but it looks so promising that it's got my full attention.

 

I've just ordered Steve Nison's book ( Japanese Candlestick Charting Techniques) so hopefully I can digest the concept better.

 

Cheers

 

 

Blu-Ray

[brownsfan019 17]

blu,

Thanks for sharing your charts.

 

I've highlighted in yellow all possible candle patterns that I see on your chart, not looking at anything else.

 

Couple questions:

1) What market is this?

2) What tick setting is this?

 

 

Analysis: first 2 signals worked well, choppier after that.

 

Analysis: 5 trades, 5 winners.

 

Analysis: 5 trades, 4 winners. 3 beautiful green hammers on what some may call pullbacks or retracements.

[brownsfan019 17]

 

I've just ordered Steve Nison's book ( Japanese Candlestick Charting Techniques) so hopefully I can digest the concept better.

 

Blu,

That is a great book. It will require you to re-read it a few times before it starts to come together. You'll get out of it, what you put into it in my opinion. And then recognizing patterns in real-time is key, even if you don't trade them live. Who knows, you may just end up liking those hammers after all!

[Blu-Ray 10]

blu,

Thanks for sharing your charts.

 

I've highlighted in yellow all possible candle patterns that I see on your chart, not looking at anything else.

 

Couple questions:

1) What market is this?

2) What tick setting is this?

 

 

Thanks Brownsfan for the analysis, the market is the DAX and its a 55Tick Chart.

 

I don't know if you think that might be too quick to learn on or maybe moving out to a larger timeframe to grasp the concept easier.

 

Thanks

 

Blu-Ray

[wrbtrader 10]

Here's some charts that happened today when my system fired off some signals, I'm trying to incorporate candlestick analysis to aid my decisions, but I'm not trading directly off candlestick analysis.

 

First off, I'm a newbie when it comes to candlestick analysis, so go easy on me;)

 

All charts are short term tick charts.

 

1st chart fired off a buy signal, but the two previous candles were trying to go higher but pushed down very fast in real time, then the signal was generated. I decided to step aside as although my system generated a buy signal, the candles were telling me otherwise.

 

http://www.traderslaboratory.com/forums/attachment.php?attachmentid=2340&stc=1&d=1187044986

 

2nd chart fired off a short signal but on that candle was also a dragonfly doji, so I passed on the trade, however would have turned out to be a winner.

 

http://www.traderslaboratory.com/forums/attachment.php?attachmentid=2341&stc=1&d=1187044986

 

3rd chart fired off a buy signal and also had the bonus of it being a hammer, I took the trade as it gave me extra confidence.

 

http://www.traderslaboratory.com/forums/attachments/104/2342d1187044986-constructing-a-candlestick-trading-plan-chart3.png

 

I think basically what I'm trying to say is that I'm starting to look at candlestick patterns to filter my trades, I'm still very new to this candlestick analysis but it looks so promising that it's got my full attention.

 

I've just ordered Steve Nison's book ( Japanese Candlestick Charting Techniques) so hopefully I can digest the concept better.

 

Cheers

 

Blu-Ray

 

Hi Blu-Ray,

 

Thanks for the charts.

 

Also, what's your primary trade methodology (generally without going into any in-depth details) so that we can understand better what your using candlesticks with.

 

For example, I know some scalpers using Japanese Candlesticks with their Market DOM analysis.

 

With that said, here are some things you should keep in mind as a new user of Japanese Candlestick Analysis:

 

* Start very slow. Thus, select only a few patterns to study, research and trade for the first year of using Japanese Candlestick Analysis and Hammer patterns are one of the best place to start because they provide a wealth of information such as new support/resistance zones.

 

For example is your 3rd chart, that Bullish Hammer pattern became an s/r zone via producing a swing point...a swing point that later had impact on another Bullish Hammer pattern about 23 intervals later.

 

Now take a look at your 2nd chart involving the Dragon Fly...scan backwards (to the left)...what do you see?

 

You see a lot of Inverted Hammers with long upper shadows producing a s/r zone that the Dragon Fly was able to exploit.

 

Simply, Hammer patterns involved in swing points represent Candlestick S/R Zones.

 

What about the 1st chart?

 

First of all, there's no confirmation signal or a s/r zone to give that Long Legged Doji support to push higher unlike the Dragon Fly in the 2nd chart that had an established resistance area from the prior price action involving Inverted Hammer lines.

 

Therefore, if Dojis or Hammers are involved in a swing point, regardless if you trade them or not...

 

Don't forget about them because they can help setup trades later in the trading day or provide excellent profit targets for other trades.

 

For example of profit targets, go back to your 2nd chart involving that Dragon Fly.

 

Now scan backwards about 13 or 14 intervals to those back to back (consecutive) Hammer lines.

 

Those Hammer lines produce a swing point that sent price upwards until the formation of the Dragon Fly.

 

Had you taken that Short positiong involving the Dragon Fly, you could have used those earlier Hammer lines as profit targets especially since those Hammer lines occurred after a WRB (red wide range body on your chart).

 

Therefore, hypothetically, you could have exited that Short signal (Dragon Fly) about 8 - 9 intervals later.

 

Once again, start slow especially now that you will soon get your hands on Steve Nison book.

 

Use the book as a Definition Only and not as a trading plan.

 

Further, your going to have access to many different types of patterns and the last thing you want to do is try to learn them all or try to apply them all.

 

Just pick a few patterns and in my opinion Hammer patterns are one of the best places to start.

 

That should keep you busy the first year of learning about Japanese Candlestick Analysis.

 

P.S. Eurex DAX is an excellent trading instrument for Hammer pattern trading.

[brownsfan019 17]

Thanks Brownsfan for the analysis, the market is the DAX and its a 55Tick Chart.

 

I don't know if you think that might be too quick to learn on or maybe moving out to a larger timeframe to grasp the concept easier.

 

Blu,

The speed of the chart is a consideration, so it really depends on how well you pick up on seeing the patterns in real-time. As Mark said, focusing on a small number is a good way to start. As you read Nison's materials, you'll see other patterns by default. Don't ignore them, but focus your energies on a small handful for now and learn them inside and out. And remember - recognizing the pattern is the first part. You still have to define stop placement, entry placement and profit target(s). We'll talk about this in another thread when I have some more time to put it together. For example, in your 3rd chart, there were 3 very profitable trades there. The question then becomes, what profit did you extract and why? Did you take the first hammer and then just let it ride or were you able to trade all 3 hammers and make 3 profitable trades as a result?

[Blu-Ray 10]

Brownsfan and NihabaAshi,

 

Thank you both very much for your analysis and advice, it is much appreciated.

 

My primary trade methology is basically scalping off S/R zones and also flip trades ( Thanks Walter ! ). As I said originally I am starting to notice the candlestick patterns at my S/R zones which are helping me, but I wasn't noticing the previous patterns as you have kindly pointed out.

 

I shall take your advice and concentrate on a couple of patterns and go from there.

 

Thank you very much

 

Blu-Ray