Constructing a candlestick trading plan

[Blu-Ray]

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]

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]

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]

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.

[NihabaAshi]

	Quote:	Blu-Ray
	...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]

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

[Nick1984]

	Quote:	brownsfan019
	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]

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]

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]

	Quote:	Blu-Ray
	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!