[wrbtrader]

Originally Posted by guruji »

Thanks for your comments and taking the time to go thru what I did. Your comments are valuable and will probably guide me forward. A few comments :


- My goal is not build a trading system based on candlestick based trading system but understand if they mean some thing. I think this exercise is valuable to build a good and robust trading system. There are infinite number of primary/secondary signals that people use. To test each combination of these signals would be a huge effort.

- I am using a doji after 5 down days as a trend reversal pattern and not in isolation

- Yes, trade management is key. My success rates change quite a lot if I allow my trades to last longer than the next day. I can even make them profitable. But I would like to find a primary signal that gives me 65-70% success rate before I go into optimizing trade management. (may be I won't get there... or... i will)

Hi,

Thanks in replying.

There are hundreds of documented testing performed on candlestick patterns in isolation and your blog results is just another one. You're doing nothing new in comparison to all the prior blogs, websites, magazine articles, forum discussions et cetera. However, that's not a concern because I do understand that you're trying to see for yourself via your own data instead of listening to others that have done the same before you.

There are infinite number of primary/secondary signals that people use. To test each combination of these signals would be a huge effort.

That's correct and you don't need to test them all because that's impossible...just start with one. Like I said to you in my prior reply...you're going to need to sit down and make a decision. You can continue testing candlestick patterns the way losing traders use them or test them the way profitable traders use them. Choosing the former instead of the latter as a valuable exercise to build a good and robust trading system doesn't have merit. That's ok for simplicity (computer codes) or discussion but not ok as an exercise to building a robust trade method. A robust trade method involves a complete trading plan and candlestick patterns is not the only chapter in a profitable trader's book.

I know...I've stood in the past where you're at right now via trying to approach trading via pure science (computer codes). However, if you're going to be a profitable trader...I recommend you make the effort and concentrate your efforts on testing candlestick patterns the way profitable traders use them instead of the way losing traders using them unless the purpose of you're testing is to show how losing traders are using Japanese Candlesticks.

I am using a doji after 5 down days as a trend reversal pattern and not in isolation

That price action definition is not within context. Here's a example (hypothetical) of a candlestick pattern within context (understanding the price action). The S&P 500 breaks below a key support area and begins making lower highs with failed counter-thrusts in between those lower highs along with other key markets doing the same. In addition, the industry group itself involving your selected stock is getting hit with negative news and then 5 consecutive down days appear. This is an example of within context because you understand the price action, able to explain it. Thus, to be looking at bullish candlestick patterns via a code only...you'll be ignoring the "within context" information I just revealed...you're testing candlestick patterns in isolation. (I have stood in the past where you are at right now...I know exactly what you're trying to do).

Further, if you truly understood the price action and are not using candlesticks in isolation via some analytical computer code...you should have designed a code to look for and test the reliability of dojis as a bearish continuation signal after 5 consecutive down days and then compare the results to using dojis as a bullish reversal signals (I'm going to give a little via pretending that a doji is a reversal signal even though it's an indecision price action)...thinking outside the box.

Reminder - each candlestick pattern has different sub-groups.

Here's a real example of within context via your GNW Financial of October 2008 chart at your blog instead of my hypothetical explanation above. Your code involves a handful of intervals only and your posted chart of GNW is a financial stock during a time period everybody was running scared in the overall financial crisis along with the fact that GNW had fallen from $25 price range to $3.50 price range...your code explanation with zoom-in chart is an example of using candlestick pattern in isolation while ignoring the facts I just explained (that within context information). Therefore, you're trying to let a code define the price action instead of you understanding the price action prior to the appearance of any candlestick pattern. Should you been looking or testing for bearish continuation signals or bullish reversal signals or both (thinking outside the box)...comparing the reliability information of each for "within context" situation I just explained about GNW ?

Lets now talk about the AIV chart at your blog because it represents a Bullish Hammer "continuation" pattern. Instead, you in error called it a Bullish Hammer "reversal" pattern. There are several subgroups of hammer patterns called continuation hammers and reversal hammers. Your AIV chart falls under the continuation sub-group category that can be broken down further into different variations because I took a closer look at AIV chart via my own data provider with many months of price action in comparison to you zoom-in chart of a few intervals in isolation. AIV is clearly in an uptrend with obvious support levels when a small retracement appears involving that hammer line. Had that hammer line appeared below any key support areas along with the uptrend having a key change in supply/demand...that's when you can designate a hammer pattern as a "reversal" instead of as a "continuation" (this is something you aren't going to read in any books nor learn from codes of losing traders trying to build a robust system).

Like I said, there are problems with your candlestick pattern identification but that's ok because you did say you are new at this and you're obviously approaching this via codes only (in isolation) as seen by those that have done in the past what you're currently doing. Therefore, I think a good exercise for you and the readers of your blog is for you to show zoom-out charts that show many prior months of price action before your candlestick patterns along with those zoom-in charts that only show a handful of intervals in isolation without any "within context" information. The zoom-out charts will encourage your readers to seek on their own the "within context" information that may agree or disagree with your analysis.

Mark

[guruji]

Essentially you are saying that context affects the interpretation of a candlestick pattern. And I think I agree with that.

From the perspective of algorithmic/automated trading the challenge is quantify the context.

Thanks for the comments.

[SIUYA]

Originally Posted by guruji »

essentially you are saying that context affects the interpretation of a candlestick pattern. And i think i agree with that.

From the perspective of algorithmic/automated trading the challenge is quantify the context.

.

the holy grail to back testing and auto trading

[wrbtrader]

Originally Posted by guruji »

Essentially you are saying that context affects the interpretation of a candlestick pattern. And I think I agree with that.

From the perspective of algorithmic/automated trading the challenge is quantify the context.

Thanks for the comments.

Exactly and that's a tough task for a retail home base trader. Also, it depends on what the context is to determine if it can be quantify because some context can't be quantify...rise of the discretionary trader. However, that's where market experience comes into play to compensate for what something else in the trading plan is not able to do with the interpretation of candlestick patterns or any other type of trade signal.

It's teamwork via everything working together to form a trading plan = market experience, market context, money management, position size management, proper capitalization, proper computer equipment, proper trading platform, entry signals, trade management after entry et cetera. Thus, you can quantify some aspects of a trading plan and depending upon the trading day...one aspect in the trading plan will be more important than other aspects in hindsight.

Simply, technical analysis and it's subgroups (e.g. Japanese Candlesticks) are just one chapter in the book of trading...each dependent upon the other to make the few profitable if the pieces of the puzzle fits. Yet, there's different trading plans out there which is why some traders don't have a chapter in their book (trading plan) involving Japanese Candlesticks. In contrast, I do have candlestick analysis as one chapter in my trading plan.

Mark

[windsurfer]

I looked at this forum because I was interested in the question of whether Candlesticks work.

What I have concluded from the (much appreciated) discussion so far is that candlesticks by themselves are not of value, but they may be "in context". I take this to mean, in combination with other facts. I'd be interested in this being quantified. For example, "a doji in a short term downtrend and long term uptrend will result in a reversal x% of the time, but if both trends are in the same direction, it will result in a continuation y% of the time." (Of course, this statement needs quantification as well- including a definition of trends and time periods). But I'm just giving it as an example of a possible context.

This is the direction in which I personally would like the discussion to proceed. Guruji, how will you be proceeding? (I'm also interested in what your study of the doji following 5 down days showed, although I expect this event is so rare that it is not tradeable)

[brownsfan019]

Originally Posted by windsurfer »

I looked at this forum because I was interested in the question of whether Candlesticks work.

What I have concluded from the (much appreciated) discussion so far is that candlesticks by themselves are not of value, but they may be "in context". I take this to mean, in combination with other facts. I'd be interested in this being quantified. For example, "a doji in a short term downtrend and long term uptrend will result in a reversal x% of the time, but if both trends are in the same direction, it will result in a continuation y% of the time." (Of course, this statement needs quantification as well- including a definition of trends and time periods). But I'm just giving it as an example of a possible context.

This is the direction in which I personally would like the discussion to proceed. Guruji, how will you be proceeding? (I'm also interested in what your study of the doji following 5 down days showed, although I expect this event is so rare that it is not tradeable)

Sounds good WS - let us know what you find out from your analysis.