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About Candlesticks: Why they were created? What do they reveal? 160 replies

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Attachments: We were fools to believe candlesticks can predict
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We were fools to believe candlesticks can predict

Oh I see. The idea that people can use a predefined formula based on fluffy "crowd psychology" to determine when precisely the best time is to enter the market to me is not sensible, such a rigid approach underestimates the size and infinite amount of variables which make up the market.

Quoting Fudomyo
{quote} Your post about patterns not repeating themselves was the initial reference point for my post. What I was talking about wasn't directed at you personally.
Quote
The problem a lot of people have with technical trading is literalism.

The reason why SD trading, VSA, and many other techniques are deeply flawed is because they're oversimplifications of market functionality.

When Honma (the person who invented candlestick trading) wrote about his candlestick techniques, his intention was to teach a way of reading......


nice post fudomyo
Quoting Wolf_Wicked
I'm not laughing One of the best pieces of advice I ever received from a fellow trader was this; Start by lowering your expectations to a win rate of 50%. At 50% immediately you are forced to do a few things; Your Trades: - let winners run - cut losses short - put s/l in a place that gives your trade the best possible chance - look for good r:r - be selective with your trades Your Mindset: - accepting that chance of loss is high, and planning for it - accepting as per your thread title that "knowing" is a fools game - realizing that you don't...
THIS +1
The risk is what gives value to an investment.
Quoting Fudomyo
{quote} The problem a lot of people have with technical trading is literalism. The reason why SD trading, VSA, and many other techniques are deeply flawed is because they're oversimplifications of market functionality. When Honma (the person who invented candlestick trading) wrote about his candlestick techniques, his intention was to teach a way of reading market conditions, not a handbook of exact rote patterns which should be rigidly applied. Unfortunately many people fail to expand on his principles and most don't even understand the basics...
thank you for this!


Wyckoff? hmm.. Wyckoff. sounds familiar. not a name easily forgotten haha. but oh, this is why, I've come across his name in my reading before (article by Todd Kreuger):
VSA is the improvement upon the original teaching of Richard D. Wyckoff, who started as a stock runner at the age of 15 in 1888. By 1911, Wyckoff was publishing his weekly forecasts, and at the height of his popularity, it was rumored that he had over 200,000 subscribers....


"VSA is the improvement upon the original teaching of Richard D. Wyckoff"??
  • Post #105
  • Quote
  • Edited Oct 27, 2013 3:11pm Oct 26, 2013 5:49pm | Edited Oct 27, 2013 3:11pm
Price charts show only the past. Hence anybody who uses a price chart, for whatever reason, implicitly believes that the past can be used to predict the future.

There are only two ways that I know of to potentially obtain an 'edge':

1. Using analysis (whether TA, FA, whatever) of past data to create forecasts, for entries and/or exits, that offer directional or behavioral bias (better than 50/50).

2. By simply making high RRR trades (cut losses quickly, let winning trades run), on the assumption that price will 'trend' far enough, frequently enough, to make this approach on-balance profitable.

If you don't have an edge that's somehow grounded in recurring market inefficiencies, i.e. in the 'hows' and 'whys' of price movement, then your methodology is no better than random guesswork, and costs (spreads etc) will eventually defeat you. The more expansive your MM, the more quickly that defeat will occur.
______________________

[EDIT]
Re Mark Douglas, IMO it doesn't matter whether he trades himself, or not, because his books don't purport to teach a trading methodology. Suppose I roll a die many times. I know that the probability of rolling "3 or higher" (4/6) is twice as great as the probability of rolling "2 or lower" (2/6). I don't know, nor do I need to know, in advance which of my rolls will be 3 or higher, but in so much as I maintain the discipline to bet on this outcome every time, ignoring the results of any previous rolls, I will win more often than I lose. That is effectively the meaning of an 'edge', and the same logic can be applied to the markets (including bbmac's 5 maxims in post #22). Now, if I may be conceited, I've explained, in a couple of sentences, the gist of what Mr Douglas labors repetitiously throughout an entire book.

Or to put it another way, consider Gil Blake's success formula (see New Market Wizards, p 248):
"There are five basic steps to becoming a successful trader. First, focus on trading vehicles, strategies, and time horizons that suit your personality. Second, identify nonrandom price behavior, while recognizing the markets are random most of the time. Third, absolutely convince yourself that what you have found is statistically valid. Fourth, set up trading rules. Fifth, follow the rules."
So now we have condensed the gist of Trading In the Zone down to: "having found an edge (points 2 thru 4), follow your rules (point 5)".

However, since psychology presents an existential rather than an intellectual problem, perhaps it could be argued that Trading in the Zone is an inspirational, rather than an educational, read. The need to maintain discipline in trading is surely self-evident.

In discussions like this thread, arguments often occur because people's definition of terms like "random" and "predict" differs. If markets were a totally "random" walk, i.e. the probability of price rising or falling was exactly 50/50 at all times, then all systems would have an expectancy of zero, and no trader could attain long term profit. But to whatever extent a directional or behavioral bias exists at a given point in time, it is possible to profit, by "predicting" the future, not necessarily with absolute certainty, but on the balance of probability. Again, that is what authors like Mr Douglas mean by an 'edge'.
I think the more people look at the same chart, there is more likely hood of that chart self-fulfilling! Sheer weight of numbers.
Quoting Fudomyo
{quote} The problem a lot of people have with technical trading is literalism. .......
The problem with candle sticks that I see is that the people who use them are predictable in there response. The markets can become inefficient many times due to the predictable nature of these people and they leave themselves open to attack.
Quoting pemully
we practiced witchcraft,believing that candle bars would predict the future.We will be studied and laughed at,by future generations.We were traders.

I was a fool to believe I was a fool.

Now i know better
Quoting hanover
...... an edge that's somehow grounded in recurring market inefficiencies, i.e. in the 'hows' and 'whys' of price movement.....
Re candle types and prediction: I've come to realize that one very important element in analysis is context. Using my recent post here as an example, the 'how' (chart pattern) is explained in the first part of the post, and the 'why' (underlying drivers and reasons) in the second part.

In the first example/screenshot, the signal candle (white arrow) is simply a strong bullish candle; in the second example/screenshot (white arrow) it is a bearish pinbar, or shooting star. Now my point is that these candle types, in isolation, probably offer no better potential than 50/50, but within the context of the chart pattern (white box), they are significant in that, by highlighting a strong reversal, they offer insight into what the 'professional' money might be doing.

We can take this concept a step further. The chart patterns themselves (price reversing from the opposite side of the white box/prior swing point) may not offer a hugely better directional bias than 50/50, but viewed within a still wider context (e.g. how 'significant' the prior swing point is; an analysis of volume; a breakdown of what is happening on other timeframes; etc), we can discern whether this is more likely to be professional activity, or merely a 'randomly' generated pattern that looks like it.
Hey Hanover,

I like the way you mention that using analysis in context is very important.

When I view a price chart I am looking into it with a view of finding locations of where traders "need" to trade as opportunities to profit can arise from these situations.

The circumstances that form the setting are a very important aspect of what I am looking for.

By seeing certain setups and areas on a price chart we can ascertain as to where traders may be "forced" into trading. Taking this one step further we know from the way that price moves that wherever large traders demand liquidity price's will move.

A trade will move price when ever its size and immediacy is greater than the markets ability to absorb it.

A candle chart is not 100% useless but its use should be applied only when reinforced by information ascertained off the chart.
,
Quoting hanover
Price charts show only the past. Hence anybody who uses a price chart, for whatever reason, implicitly believes that the past can be used to predict the future. There are only two ways that I know of to potentially obtain an 'edge': 1. Using analysis (whether TA, FA, whatever) of past data to create forecasts, for entries and/or exits, that offer directional or behavioral bias (better than 50/50). 2. By simply making high RRR trades (cut losses quickly, let winning trades run), on the assumption that price will 'trend' far enough, frequently enough,...

good points @ hanover,

I think T.A is largely an esoteric art.Trading patterns is largely discretionary.I have seen a few successful practitioners like Anup,that guy was/is a legend.I think the statement by William Eckhardt that 98% of the things that look good on a chart turn out to be worthless is true.Finding the 2% that works is no mean task.

Marty Shwartz was the best T.A trader in the world without question....by mid-2000 he said he spent 5 years trying to unsuccessfully trade the S&P,he had to adopt another trading method to survive(selling puts).The markets had become efficient.

Gary Smith once put a reward for any successful intra-day ES trader,none stepped up to the challenge.Why im I comparing ES to FX? because I have seen irrefutable data that show the forex majors are becoming efficient like indexes,historically fixed income and FX were the most trendiest.

I have found sentiment to be of inestimable value to me,just stay the course as long as retail sentiment is heavily biased against your position-it does not change overnight.Thats where the 10R+ trades come from.
wo-yoy! wo-yoy! wo-yoy! wo-yoi! wo-yoy-yoy-yoy!
What was the reward from this Gary Smith guy? Was it for SPX as well? Did it include options?

I know of guys who use price charts with current price action to make money in spot FX, so I know it is possible. Fact is it is a highly technical market, have you heard of model funds? Obviously the really good retail traders I have seen know the market well and are aware of underlying drivers of FX markets (equities), but from what I can tell, they were using bar analysis mostly for trading. Those were the best traders I have seen yet. Personally I think it was formed from years of trading, there was something intuitive about it. I think they might agree that studying charts by themselves is a waste of time though. Does anyone have any proof that this retail data is significant? I would think it isn't, maybe on yen pairs sometimes.
  • Post #114
  • Quote
  • Edited Oct 28, 2013 3:09pm Oct 27, 2013 3:48pm | Edited Oct 28, 2013 3:09pm
@pemully, @redbaron1981, it's always good to see that folk are thinking outside of the 'conventional TA' box. This often leads to some of the more worthwhile discussions, IMHO.

I likewise feel that spot, especially the majors, is becoming more efficient, and hence more difficult for the retailer to trade profitably. However, I draw some encouragement from axioms like the following:

1. Prices must always move, in order for banks to meet their agendas, and large institutions to make money. Large players invariably need to find pools of liquidity.

2. Markets always move from periods of consolidation, to expansion, and then back to consolidation, and so on.

3. As long as 'amateurs' continue with much the same approach (e.g. look for breakouts/bounces at S/R levels, place their SLs just outside obvious swing points etc), the pros will necessarily persist in using much the same tactics to exploit this.

4. Traders will always seek to avoid loss, creating certain pattern types.

5. Traders must bank their profits somewhere, likewise creating certain pattern types.

6. Market makers will always attempt to balance their books.

7. Money must always flow between nations, for a variety of reasons. Moreover, one nation's economy will always be perceived as being stronger or weaker than another's. These two axioms will ensure that trends exist, if not in the majors, then in the crosses and exotics, allowing profit to be obtained by pairing negatively correlated currencies against each other.

These, and no doubt other factors that I've overlooked, will always ensure that price "needs", as you (redbaron) deftly put it, to attain certain levels. Your other points make good sense to me, also. Great minds think alike, LOL

Fudomyo's words speak to me also, especially these:
"Trading is the art of seeing and having the ability to act on certain conditions. These conditions never look exactly the same because you never have the same amount of traders taking the same position sizes or entries in a repeatable pattern. Every accumulation and every distribution looks different, but it doesn't mean the market isn't constantly accumulating or distributing. And there is absolutely nothing random about the functionality of this process.
......

Actually, the real reason why people fail is simple. They think the market was designed as a place for them to make money. Nothing is further from the truth. The big players who are moving the market practice deception and subterfuge to increase their earnings, they don't telegraph their intentions to give money away.

It takes years to reach the point of being able to read this properly...."
Nicely explained IMO, and all very relevant to this discussion.

@pemully, I recall from your comments that you've looked into the opentrader.com site. These guys trade the ES predominantly, and mim2005 frequently attends their trading room. The top guys in the room are able to anticipate swing points with some accuracy and consistency, using a combo of MP, supply and demand, and some other proprietary tools. A couple of the guys are trading 7 figure accounts. It seems that it's still possible to trade ES profitably, if one knows what one is doing, despite its increasing efficiency. (@everybody: The blue section in post #93 in the linked thread was written by one of the opentrader guys and is a valuable read IMO, again stressing the importance of context........ which further highlights the difficulties involved in developing a profitable automated trader ).
Hi! Candlesticks are a funny business Sometimes they tell the direction, sometimes they don't. I look for shooting-stars/doji/wik/ that kind of candles. In my opinion they are the direct sign that the price found the last buyer/seller and now everyone is on board the sell/buy train (in the perfect case ) However, let's assume that on M30 we have a wonderful shooting start, perfect buy case, but on the M5 there is an engulfing bearish candle (LL &HH than the last ), we have a contradiction. This is the reason why I treat candlestick patterns only with my instinct and gut feeling.

Of course I am aware that even a monkey can be trained to push the green/red button when he sees a circle,a square, or a car ( he might push it harder if he sees a giant one ) This might seem the obvious reason why they (candlesticks) sometimes work. IF you have the same picture on your chart as the majority of the market participants, then your trade will go into profit.

I skimmed the gold chart for some doji-type of CS formation and they seem rather random. When coupled with other technical analysis they become more valuable. And also with higher time-frames.
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Hi. I'm extremely new to day trading. Currently researching various markets which has brought me to forex factory. Quick question regarding the calender function. Does it make sense to put in pending market orders based around high impact items? Maybe a buy stop a few pips above the current price and also a sell stop a few pips below the current price a few minutes before the time of expected data. This way either of my trades will jump on the price action after the release of high impact data? Does anybody trade this way or am I being too simplistic? Thanks for the help.
Even a journey of a thousand miles starts with a single step.
It's all about the probability of a certain price action signal combined with risk-to-reward. You can still be successful by winning only 40% of the time.
Hey Hanover,

I can't really agree with you on one of your points from above, and as this is a discussion I would like to contribute my thoughts to this subject.

Quote
"I likewise feel that spot, especially the majors, is becoming more efficient"

For me the markets are to psychological for this to happen. An efficient market requires rational thinking and when we bring humans in to the equation we know that humans are non rational by nature.

One post that really stood out for me was from Gaston.

Here is the post http://www.forexfactory.com/showthre...ge#post2335264

Quote
"Ask yourself this: What do you absolutely KNOW about the market? In this question lies your edge."

I will not publish my list here as I think its important for traders to use a personal touch for this however here is one item that was in my list and it is also used as the basis to my own trading methods.

Markets are dominated by traders and traders by nature have financial constraints.

It is for reasons like this that I believe that markets can never become efficient.
Quoting pemully
Marty Shwartz was the best T.A trader in the world without question....by mid-2000 he said he spent 5 years trying to unsuccessfully trade the S&P,he had to adopt another trading method to survive(selling puts)..
Out of interest where did you find out this information? I've tried to look him up a few times and found hardly anything on the net. I read Pitbull and it's probably the best trading autobiography I've ever read. What a fucking legend that man is.
Quoting TranceTrader
{quote} Out of interest where did you find out this information? I've tried to look him up a few times and found hardly anything on the net. I read Pitbull and it's probably the best trading autobiography I've ever read. What a fucking legend that man is.
listen to the part he says about how frustrated he was trading the S&P.


http://www.google.com/url?sa=t&rct=j...55123115,d.ZG4
wo-yoy! wo-yoy! wo-yoy! wo-yoi! wo-yoy-yoy-yoy!
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