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Candlestick Analysis - Do You Use It?

  • #1
  • First Post: Jun 17, 2010 5:19am Jun 17, 2010 5:19am
I was recently looking at a few candlestick patterns and mechanically testing them to see if the provide a tradeable edge. The ones I tested appeared to. So what candlestick signals do you find useful?
  • #2
  • Jun 17, 2010 6:19am Jun 17, 2010 6:19am
Read Steve Nison's Book Japanese Candlestick Charting Techniques. He is THE authority on this as he translated the original texts and first introduced the concept to western trading.

He states very clearly, that reversal patterns are subject to interpretation and that no trade should be entered based SOLELY on the candlestick pattern. Rather, in conjunction with other techniques...support/resistance, fibo level, possibly even oscillator divergence.

My point is that "mechanically" testing one or two patterns will not provide reliable results.

All that being said I have been using candle patterns now for the last year and find they are extremely valuable when applied as stated above. A given reversal pattern may mean nothing unless it occurs in a specific area...like a key support/resistance area, or a fibo level or a moving average (bounce). It is a very discretionary method of evaluating markets and NOT mechanical.
  • #3
  • Jun 17, 2010 6:43am Jun 17, 2010 6:43am
Quote
It is a very discretionary method of evaluating markets and NOT mechanical.

You can make rules for the most if you're smart.
  • #4
  • Jun 17, 2010 7:02am Jun 17, 2010 7:02am
I have been reading alot into candlestick analysis. And these are my conclusions:

1- Pin bars , the popular candlestick on forexfactory is weak/average candlestick.

2-You cannot use candle sticks on their own.

3- The longer the time frame , the better they work.

4- You can be more aggressive and ignore candle stick patterns. Because so far I think waiting for candlestick patterns can give you a late entries than using momentum/volume.

Thats my opinion.
  • #5
  • Jun 17, 2010 7:13am Jun 17, 2010 7:13am
Quoting Walcott
You can make rules for the most if you're smart.
Agreed. And that's what Davidee did I believe.

To answer Davidee question, I use only reversal candles: hammers, shooting stars and engulfing formations.
Trading = a mirror to your human flaws. Fix them or be fixed.
  • #6
  • Jun 17, 2010 7:32am Jun 17, 2010 7:32am
Quoting soso

To answer Davidee question, I use only reversal candles: hammers, shooting stars and engulfing formations.
What is the time frame you trade with reversal candles?
Which are the pairs favored with reversal candles, if any?
  • #7
  • Jun 17, 2010 7:34am Jun 17, 2010 7:34am
Quoting Brb-Fraudin
I have been reading alot into candlestick analysis. And these are my conclusions:

1- Pin bars , the popular candlestick on forexfactory is weak/average candlestick.

2-You cannot use candle sticks on their own.

3- The longer the time frame , the better they work.

4- You can be more aggressive and ignore candle stick patterns. Because so far I think waiting for candlestick patterns can give you a late entries than using momentum/volume.

Thats my opinion.

What is the time frame you trade with reversal candles?
Which are the pairs favored with reversal candles, if any?
Can you illustrate some trades with reversal candles together with momentum/volume?
I wish to incorporate your method into my trading method, if it is ok for you.
Thanks.
  • #8
  • Jun 17, 2010 7:36am Jun 17, 2010 7:36am
Quoting gspajon
All that being said I have been using candle patterns now for the last year and find they are extremely valuable when applied as stated above. A given reversal pattern may mean nothing unless it occurs in a specific area...like a key support/resistance area, or a fibo level or a moving average (bounce). It is a very discretionary method of evaluating markets and NOT mechanical.
Pls. share some illustrations on what your said above for better understanding.
Can you tell which is the time frame you trade with candle patterns?
What about your favorable pairs?
Thank you.
  • #9
  • Jun 17, 2010 8:25am Jun 17, 2010 8:25am
Quoting snake
What is the time frame you trade with reversal candles?
Which are the pairs favored with reversal candles, if any?
Can you illustrate some trades with reversal candles together with momentum/volume?
I wish to incorporate your method into my trading method, if it is ok for you.
Thanks.
Sorry , I am still learning like you. I am sure more experienced trader can help , I was just stating my opinion which maybe right or wrong.
  • #10
  • Jun 17, 2010 8:40am Jun 17, 2010 8:40am
I use some. I trade 1m charts. The candles have to be standouts and mostly I am looking for shooting starts, dojis, and hammers.

By standouts I mean, the candle should higher high or lower low than all of the near by candles. It cannot be grouped in with other candles.

From my experience, which isn't much, candles are great to know but need to be used with s/r or something else. Even the auther of the book points out that 1 candle alone does not count as a signal, but three candles count. That just adds to the point that candles are helpful but need to used with other indactors.

I hope that helps.
  • #11
  • Jun 17, 2010 11:02am Jun 17, 2010 11:02am
Quoting soso
Agreed. And that's what Davidee did I believe.

To answer Davidee question, I use only reversal candles: hammers, shooting stars and engulfing formations.
Really, hammers and engulfing formations was what I tested.

I'd never trade just because of the shape of a single candle, but if these patterns had any merit then an 'edge' should be detected, providing you can define them mathematically, and you can. http://www.myforexdot.org.uk/candlestickanalysis.html

Hammers/Hanging-man candles showed an edge ratio on the EURUSD with a 5-day time-based exit of 1.068 to 1 when defined as one side of the wick being at least twice the length of the body and an edge ratio of 1.164 to 1 when defined as at least three times the length of the body.

Englufing patterns defined as the previous candle being completely engulfed and a close above or below the previous candles high and low had an edge ratio of 1.131 to 1 on the EURUSD with a 5-day time-based exit.

These edges probably aren't good enough to soley trade because of the shape of one particular candle, but I believe these edges do exist and these results of > 1 don't appear by random chance.
  • #12
  • Jun 17, 2010 12:31pm Jun 17, 2010 12:31pm
David, your test implied other parameters also? Like considering the market trend/context where they are found? I assume that taking trades in the direction of the longer term trend and/or taking into consideration SR zones could improve the profit factor.

In fact, I'll start writing a test EA. I'll get back with the results.
Trading = a mirror to your human flaws. Fix them or be fixed.
  • #13
  • Jun 17, 2010 1:01pm Jun 17, 2010 1:01pm
Quoting Brb-Fraudin
I have been reading alot into candlestick analysis. And these are my conclusions:

1- Pin bars , the popular candlestick on forexfactory is weak/average candlestick.

2-You cannot use candle sticks on their own.

3- The longer the time frame , the better they work.

4- You can be more aggressive and ignore candle stick patterns. Because so far I think waiting for candlestick patterns can give you a late entries than using momentum/volume.

Thats my opinion.
QFT
With a good book and quality paper you can fine wipe your ass.
  • #14
  • Jun 17, 2010 2:32pm Jun 17, 2010 2:32pm
Candles with long wicks (shadows) compared to the bodies often define and confirm important resistance & support areas.

Think of the wicks as the opposite team being spooked out.
It never gets easier, you just get better
  • #15
  • Jun 17, 2010 3:28pm Jun 17, 2010 3:28pm
Quoting soso
David, your test implied other parameters also? Like considering the market trend/context where they are found? I assume that taking trades in the direction of the longer term trend and/or taking into consideration SR zones could improve the profit factor.

In fact, I'll start writing a test EA. I'll get back with the results.
There were no other parameters in this test, but a trading system would need other factors.

Whenever a daily candle appeared that met the criteria we entered in the direction the candle implied and exited after 5 days.

For example, in the case of the test for engulfing candles the only rules were: If a daily candle completely engulfs the previous one and also closes above the high of the previous candle we go long, if a daily candle completely engulfs the previous one and closes below the low of the previous candle we go short. That was it. Those rules alone on the EURUSD provided an 'edge ratio' of over 1.1 to 1. I can only conclude that candlestick analysis can provide an edge and I intend to test more patterns.
  • #16
  • Edited 5:01pm Jun 17, 2010 4:45pm | Edited 5:01pm
Great lists of candle types.
A few more:
Three Methods,which has a balanced appearance;
and, a one-pip candle, which to me, suggests no direction, and thus aligns with extra to make a good TL or s/r line, etc.

Just beyond knowledge of the noted types and small groups of candles, are an increased edge from adding other devices (volume, lines, other patterns). Here's a thread (at least, #7 on) that broaches this subject.
  • #17
  • Jun 18, 2010 1:53pm Jun 18, 2010 1:53pm
Quoting ha-pattern
Great lists of candle types.
A few more:
Three Methods,which has a balanced appearance;
and, a one-pip candle, which to me, suggests no direction, and thus aligns with extra to make a good TL or s/r line, etc.

Just beyond knowledge of the noted types and small groups of candles, are an increased edge from adding other devices (volume, lines, other patterns). Here's a thread (at least, #7 on) that broaches this subject.

Thanks, I'll check it out.
  • #18
  • Jun 19, 2010 5:44am Jun 19, 2010 5:44am
Surely that Hanging Man picture is incorrect?
That's a Shooting Star.
A Hanging man is the same as a Hammer, it's just the context of where it appears that's different.
A Hanging Man is found after an uptrend, a Hammer after a downtrend.
  • #19
  • Jun 19, 2010 6:30am Jun 19, 2010 6:30am
candles are the very best tool in trading
as they are the most basic
each candle is a "chart"
candles with trend and S/R lines are the very best way to trade

they are like the letters in a book
its how you use them are you shakespeare are a monkey

teb
if you want me to send you the best candle formations
email me and i will put you on my list
[email protected]


Candle Formations .. 3 Candle Reversal .. With Pin Candle

One of my favourite candle formations is the 3 candle reversal .. variation with a big pin candle (nose or tail)
The “Pin” is the big shaddow on the 2nd candle in the formation. I call them “nose or tail”. .
(ie. The chart I am using is an up trend: Reverse everything in a down trend)

Here is a trade I took. when I see one as clear as this one I will take it and say thanks!

Set Up

1. We want to see this Candle formation at the end of a strong trend. The longer the better .
I like at lest 10 candles in the trend . An up trend is higher highs and higher lows.
2. We want to see a big Pin Candle (2nd candle) . the Pin part of the candle. the bigger the better .
Of coarse the tail/nose going opposite to the old trend.
3. Best if the Pin Candle’s colour is opposite to the old trend’s colour.
4. Get in 1 pip (plus spread) below candle 3 in the pattern. white line.
5. Often it will be the 4 candle you enter on, but not always.
6. 1st target (blue line) the number of pips from the top of Pin Candle (2nd candle)(pink line)
to bottom of 3rd Candle (white line) :
*** pink line to white line = white line to blue line.
7. Stop loss a few pips into the Pin (nose/tail)

Strongest trading use:
1st Reversal on the 5 min chart to the main trend on the 30 min chart/ trend.
2nd Reversal on the 1 min chart to the main trend on the 5/30 min chart/ trend.


see chart




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  • #20
  • Jun 19, 2010 8:28am Jun 19, 2010 8:28am
Hello I have a question about candles.

I am reading Steve Nison's Book Japanese Candlestick Charting Techniques.

I am not too sure how/what is the difference, between white real body, and dark real body.

Thanks for your help on this one
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