CandleStick Trend Strategy

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3rd Short Candlestick Forex Trading Strategy

The 3rd shortest candlestick forex trading strategy is a purely based on price action trading using candlesticks.

If you love forex trading strategies based on price action, this is one of them.

Timeframes: best for 4hr and Daily timeframes

Currency Pair: Any

Forex Indicators: none

BACKGROUND

If you’ve been trading for a while, you will notice that there are days when the candlesticks will start to get very short in length compared to the previous candlesticks.

Why this happens can be explained with these points below:

  • the market may be in a strong uptrend, you will have lots of bullish candlesticks showing on your charts. The the market starts to slow down and this is reflected by the length of candlestick becoming very short (Difference between the High and Low becomes small).
  • in a downtrend market, you will see lots of bearish candlesticks showing on your charts which a quite long but soon they start to get shorter as the market losses the downward momentum

The key word here is momentum.

What you are looking for is a loss of momentum. A loss of price momentum can be seen when there’s a period of increasing candlesticks lengths as price picks up steam and then this changes when the candlestick lengths start to become very short.

You can see this phenomenon in all timeframes. All you need to do is open up your charts and have a loot to see what I’m referring to you here about.

HOW DO YOU TRADE THE LOSS OF MOMENTUM?

The thing is, where there is a loss of momentum occurs, this is a temporary thing only. Expect the trend to continue in the same direction or in the opposite direction.

There’s a few ways to trade the loss of momentum in anticipation of a breakout. What I’m going to show you here is by looking and counting the candlesticks.

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Well, you do this by looking for the third shortest candlestick.

WHAT IS THE THIRD SHORTEST CANDLESTICK?

The third shortest candlestick is the third shortest candlestick from the 2 previous candlesticks before it.

This means the 2 previous candlestick should be long: The difference in pips between their “highs” and “lows” are big.

When I say short, I mean unusually short or extremely short and this depends on the timeframe you are viewing the candlestick in as well.

So how do you pick your first candlestick then?

Answer: you start at the current candle that is forming and monitor the lengths of each candlestick that forms. Whatever candlestick that is unusually short in comparison to the the first 2 candlestick is the one you are interested in.

Let me explain with a chart below:

Notice that there is no logic or order in picking where to start your count 1. You can start anywhere.

But the important clue is that notice that the 3rd candlestick is extremely short in comparison to the previous two candlesticks.

This shortest 3rd candlestick is your trade entry signal candlestick.

3RD SHORTEST CANDLESTICK FOREX TRADING STRATEGY RULES

  1. Watch the current candlestick forming and note its length in comparison to the previous two candlesticks that have already formed.
  2. After the current candlestick closes and if its length is extremely (or unusually) short in comparison to previous candlesticks, then this is your signal candlestick where you will use to place the pending buy stop and sell stop orders on both sides to catch a breakout of price when it happens.
  3. Place pending stop orders on both sides of the shortest candlestick. This is to capture the breakout in any direction price moves .
  4. Place your stop loss anywhere from 3-5 pips on above the high (for a sell stop order) or below the low (for a buy stop order)
  5. When a breakout happens on one side, cancel the other side’s pending order that was not activated.
  6. How do you place take profit target? Couple of options: take profit when price reaches 3 times what you risked. For example, if you risked 20 pips than set your take profit target at 60 pips price level. Or you tail stop your trades, locking profit, placing it under the low (for a buy trade) or under high (for a sell trade). Or you can exit after the 3rd candlestick after entry.

Buy Trade Setup Example:

Sell Trade Setup Example:

TRADE MANAGEMENT

In the sell setup above, note how the trailing stop is used to lock in profits as price moves in favor of your trade.. You are trailing it behind the high of each candlestick that continues to make lower highs. As soon as a candlestick high shoots up and breaks the previous candlestick’s high than you are out of a trade.

ADDITIONAL NOTES

The 3rd shortest candlestick forex trading strategy is similar to the inside bar forex trading strategy but with this, you can also trade candlesticks that are not inside bars.Note also that the third shortest candlestick can be an also be an inside bar.

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6 Types Of Tailed Bar Candlestick Trading Strategies

Tailed bars are the most important bars on a price chart. Plain and simple. The reason they are so important is because they often give us a very strong clue as to what price might do next, more so than any other type of price bar.

Today’s lesson is a summary of my favorite tailed-bar candlestick patterns. These are the same patterns that I look for when I analyze the charts and that I trade regularly. You will learn what these patterns look like and how to identify them as well as what they mean. This will be a great introduction into different tailed bar candlestick strategies for beginners, but also, it’s an excellent refresher for those that already have a basic idea of how I trade and what I look for on the charts daily.

This lesson does rely on you knowing the basics of candlestick charts and candlesticks however, so if you aren’t too familiar with this topic then please checkout my candlestick chart tutorial for more information. I am not going to go into detail on specific entry and exits using the patterns discussed today because that is a whole topic unto itself, but I do expand on this in great detail in other articles and in my price action trading courses.

Now, let’s get started in learning about some of the best tailed bar candlestick trading patterns…

What are tailed bars?

A tailed bar is somewhat subjective in nature, but what I mean when I refer to “tailed bars” is a bar with a tail that is noticeably longer than the body or real body (area between the open and closing price).

The tails of price bars, sometimes called shadows or wicks, are important to decipher because of what they show and what they imply. They show rejection of a level or price area and either a small, medium or large reversal that happened quite quickly. This shows us that there was exhaustion at that area the tail formed, which has big implications. When we see an area price is becoming exhausted at, it means there is something happening that we need to take note of. That tail is showing us that either buyers really wanted to buy there, or sellers really wanted to sell, why doesn’t really matter, we only care about the what and the how.

A tail on a bar implies that price MIGHT move in the opposite direction, and soon. This is obviously a huge piece of data for a price action trader, and you can honestly base your entire trading approach around tailed bars if you want. Daily chart bars are, in my opinion, the most important bars and as a result, daily chart tailed bars are the most important bars of all. If you are unfamiliar with why daily charts are so important, please read my daily chart trading tutorial before moving on.

Even if we don’t have an extremely clear tailed price action signal like (my favorite) a pin bar pattern or perhaps a fakey pin bar combo signal, we can still gather a tremendous amount of information from simple tailed bars, which we will go over shortly.

In short, tailed price bars are your friend, perhaps your BEST FRIEND in the market, and I suggest you get as close to them as possible, you need to ‘fall in love’ with them and I suggest you make them the one thing you master to succeed at trading.

Examples of tailed bar candlestick patterns:

The Classic Pin Bar Candlestick Pattern

The pin bar candlestick pattern is a tailed bar that shows a sharp reversal in price across the time period of the chart. So, a daily chart pin bar is showing a sharp price reversal during that day period, whereas a 1-hour pin bar shows a reversal in price across a 1-hour period. The higher the time frame, the more ‘weight’ a signal carries, or the more important it is.

The pin bar typically has a much longer tail than the body, the body is the distance between the open and close. The tail on a pin bar should be at least 2/3 the length of the total bar, ideally 3/4. Sometimes, there is little or no body, as in the second pin bars depicted below. Here are examples of a couple of different looking pin bars that both have the same meaning; a reversal in price has occurred, represented by the long tail. The implication is that price may move the other direction, opposite the tail…

  • Here’s a real-world example of the classic pin bar candlestick pattern:

The Long-tailed Pin Bar Candlestick Pattern

A long-tailed pin bar pattern is exactly what its name implies; a pin with an unusually long tail on it. These are perhaps the most important bars in all of trading, and they are rare as well. When you see a long-tailed pin bar, stop and take notice because it’s a huge clue that price is going to swing in the other direction. Long-tailed pins often mark major directional changes in the market and even major trend changes.

Long-tailed pin bars typically have a smaller real body than a classic pin bar. Their tails are always significantly longer than any nearby bars and as such, they are impossible to miss. They are sometimes good candidates for entering on a 50% retrace per my trade entry trick strategy. Here are a couple of examples of ideal looking long-tailed pin bars. For those of you who are new: Bullish means it’s a potential buy signal and bearish means a potential sell signal…

  • Here’s a real-world example of a long-tailed pin bar candlestick pattern:
  • Another example of a classic long-tailed pin bar candlestick pattern:

Double Pin Bar Candlestick Pattern

It’s not uncommon to see consecutive pin bars form in a market, often at key chart support and resistance levels as the market is ‘testing’ these areas to see which party is going to win between the bulls and bears (buyers and sellers). You will more commonly see double pin bars or two pin bars back-to-back, but I have even seen three in a row before, but that is rare. Double-pins are something to take very strong notice of because formed within the proper market context and with confluence, they can be an obvious warning signal that price is about to surge the other direction. Here is what they look like…

  • Here’s a real-world example of a double pin bar candlestick pattern:

Note: You may notice price just barely violated the lows of the double-pin bar pattern pictured. This happens sometimes and it’s why you need to thoroughly understand proper stop loss placement on your trades before you start trading live. The proper stop loss, a wide-enough one, would have kept you from getting stopped out before the trade went on to be a huge winner…

Small tailed bars and Long tailed bars (not pin bars)

The following diagram shows what I simply refer to as “tailed bars”. These are bars with significant tails but that are not perfect enough to be considered a “pin bar signal”. As I said in the opening; tails are often significant, so we need to look at any tailed bar as potentially having an impact on near-term market direction, even if they aren’t perfect pin bar signals. I have dedicated an entire new chapter in my course to this tailed bar “phenomenon”.

  • The chart below shows a fairly ‘classic’ tailed bar. This was a bullish tailed bar that formed at a support level within an overall up-trending market; we can see it lead to a strong push higher. Note, it was not a bullish pin bar because the lower tail wasn’t quite long enough in relation to the body and its upper tail was a bit too long. But, still, the lower tail was long enough to classify it has a “bullish tailed bar” …
  • In the next image, you can see the differences between a long and small tailed bar as well as classic pin bar patterns…

Other tailed bar candlestick patterns

There are other tailed bar patterns that I get into more in-depth in my course, but for now, let’s look at some of the more common ones briefly.

Below, you will see a pin bar inside bar combo pattern, this is where an inside bar pattern forms after a pin bar and within the pin’s structure. Next, you will see an inside-pin bar pattern, now don’t get confused, this is not the same as the previous combo pattern, this is where you have a pin bar that is ALSO an inside bar, so it’s an inside bar pattern where the inside bar is a pin, essentially it’s treated just like an inside bar pattern with a little added ‘weight’ since you have that pin bar as an extra piece of confluence. Lastly, we have a fakey pin bar combo setup where the fakey or false-break part of the fakey pattern is also a pin bar.

  • Below, we can see a real-world example of a bearish pin bar inside bar combo pattern. This led to a large decline as the pattern implied. Also, notice the bearish tailed bar that followed, another nice sell signal in that downtrend…
  • Here’s a real-world example of an inside-pin bar combo candlestick pattern:
  • Here’s a real-world example of a fakey-pin bar combo candlestick pattern:

Conclusion

I hope you have enjoyed this tutorial on tailed bar candlestick patterns and what they mean. It was a brief introduction to these patterns, but you should have learned enough to start identifying them on the charts and practicing them on your demo account.

I get into these patterns and a lot more in much greater detail in my comprehensive price action trading mastery course. We go in-depth on how to enter trades using these patterns, identifying the proper chart context in which to enter them and ‘confirm’ our entry, as well as understanding how to filter the signals in different market conditions. Effectively, I teach you to read the charts from left to right, much like you read a book, which is a key element in profitable trading.

What did you think of this lesson? Please share it with us in the comments below!

Candlestick Strategy in Forex

Contents

If you prefer day trading, being skeptical to indicators, then Japanese candlestick forex trading strategy would meet your expectations. Candlestick patterns enable a trader to determine the market situation as well as supply and demand balance.

Peculiarities of the candlestick pattern analysis

The longer the «body» of the candlestick in forex, the stronger the Momentum and the greater the potential to move in specified direction. A «bullish» candlestick with the large «body» and the short «shade» shows that the buyers influence the market more than the sellers. A «bearish» candle with large body and short «shade» means that the market supply is stronger than demand. A long «shade» in specific direction means that in the process of the candlestick’s formation in forex the supply and demand balance has shifted. The changes of the market expectations can be determined by comparing the candlesticks with each other.

The short shade fr om one or the other side indicates greater chances of the movement in definite direction. Relatively equal «shades» provided the candlestick’s body is small (Doji candlesticks for forex pattern) represents market indecision – the pressure on the buyer’s and seller’s price is approximately the same. In such circumstances, even a small growth in volume of trade may cause a strong price movement; more often there is a trend to reverse.

Let us remind the main candlestick trading systems:

The candlestick patterns which may be defined as reversal patterns warn not only about reversal trend but also about the lateral movement start or exit from it; and sometimes about reduction of the movement’s speed without change of the direction. Any pattern makes sense only wh ere it reaches the strongest level. If reversal pattern succeeds then it will be followed by continuous definite movement.

All trading patterns made up of 1-2 candlesticks would lose their significance if during current movement (trend or correction in price movement) this pattern applied more than once. This is especially true for Doji candlestick patterns. The most reliable Japanese candlestick signals appear on Daily timeframe. Following timeframe decrease, the reliability of the signals lowers.

An example of trading candlesticks strategy based on Engulfing pattern

Candlestick forex trading strategy uses this candlestick pattern as reversal signal or the correction start.
Trading asset: any currency pair.
Trading period: the European and the US sessions.
Timeframe: D1 or H1.

Candlestick trading strategy for signal to buy:

  1. The formation of candlestick «engulfing» pattern is required on the low of the downward trend.
  2. The signal is confirmed: it can be Doji candlestick pattern or one more Engulfing pattern in the same direction.
  3. Low of the first Engulfing pattern must not be renewed, moreover – the more remote the price, the stronger a trading signal.

At the moment of the next candlestick opening we will open a long position. Stop Loss will be fixed below a Low confirmation signal.

Candlestick strategy forex for signal to sell:

  1. The formation of candlestick «engulfing» pattern is required on the high of the upward trend.
  2. The signal is confirmed: Doji candlestick pattern or one more Engulfing pattern in the same direction.
  3. High of the first Engulfing pattern must not be renewed.

We will open a short position at the moment of the next candlestick formation. Stop Loss will be set above the High confirmation signal.

The candlestick forex strategy with «Free candle» indicator

The trading strategy uses candlestick patterns with high reliability level and sliding average for the determination of the current trend. EMA(9) is advised for the popular currency pair trading on M15 timeframe. «Free candle» is considered to be a fully formed 15-minute candle, body and shade of which do not touch EMA (9) line, and the closing price of the candlesticks in forex trading is not higher/lower the previous extreme. «Free candle» must have the average «body» and average «shade» («hammer», «dodji» reversal patterns and GAP are not applicable).

Trading asset: EUR/USD, USD/JPY, USD/CHF, GBP/USD, EUR/GBP, EUR/JPY, GBP/JPY.
Trading period: the European and the US trading session. Candlestick forex trading in the periods of the market’s indecision is not advisable.

The main trend’s direction is determined by EMA(9). For the long position (buy), the existence of the «free» bullish candle above EMA(9) is required. The next candle’s entry after «free candle» or a Buy Stop order should be slightly higher than the closing price. The Stop Loss is fixed in max level of the «free candle».

For a short position (sell) a «free bearish candle» should be fixed below the moving average. The entry at the opening of the next candle depends on the market or should be made by a pending Sell Stop order. A Stop Loss should be fixed 3-5 points below min of the «free candle». For setting of Take Profit, two ranges of the «free candle» should be used.

A good moment for the entry when it comes to candlestick strategy trading in regard to main currency pairs appears within 15-30 minutes after the European session opening, when the market direction has been determined. The average duration of the open deal is up to 1 hour. It is not recommended to trade without Stop Loss or enter within first 5 minutes of each hour.

The deal should be opened unless:

  • distance from closing price of the «free candle» to ЕМА(9) is less than 3-4 points;
  • body of the «free candle» is less than 10 points.

From the mathematical expectation prospective, the «free candle» forex candlestick trading is sufficiently effective, if the deals are not made too often and only in reliable configurations.

General remarks regarding candlestick trading

Forex candlesticks analysis comprises of a variety of types, which may involve from 1 to 6 candles. The majority of patterns work more efficiently in the main trend direction, the reversal patterns considered to be weaker. In intraday trading, the main trend on the greater timeframe should be taken into account.

If after receiving of the candlestick signal, the movement in the market does not confirm it, then the trend will probably flow in the opposite direction. The principles of the capital management are mutual for any forex candlestick trading strategies. For the long positions Stop Loss is fixed 5-10 points below the candlestick pattern’s minimum, while Take Profit is 10 points lower than the maximum of the previous fractal. For the short position rules for fixing Stop Loss/Take Profit are similar.

Neither forex candlestick pattern can be a trade signal itself, nor can it be used for indicating of the possible entries. The pattern just shows the expectations in the market and signalizes the possible changes. For seeking of the entry, another methods of analysis rather than Japanese candlesticks should be used.

A Forex Candlestick Patterns Strategy – Trading the Large Body Candlestick Pattern

Published: September 20, 2020

In today’s article, I am going to kick off my new series on Forex strategy analysis.

That’s where I take trade ideas, concepts, or strategies out there in the Forex wild, do some data mining, show some cool graphs, hunt for correlations, and try spot any statistical hot spots we can exploit for $$$.

Basically does the strategy work or not? If so, where is it working, and where is it not?

If the data demonstrates some statistical edges, we run the strategy through a trading robot back test to simulate how they would perform.

Note:

Since this is my first candlestick pattern strategy evaluation, I wanted to focus on something really really simple – the candle body.

�� Does the candle body thickness have predictive powers? Can it give us an edge?

Let’s dive in and do some deep, but fun analysis on the candle body’s secrets.

The Candlestick Body “Chart Pattern” Strategy Explained

Quite a few years ago, browsing a Forex forum – I came across a group of price action traders who only used the candle body to make a trading decision.

  • If a candle closed bullish: they were long
  • If a candle closed bearish: sells were opened

This kind of strategy seems really stupid simple, and probably is one of the simplest candlestick strategy ideas out there.

Trading the strategy with such simple rules would straight up, not work at all – the success would be very hit and miss depending on market volatility.

This concept is missing one thing, some quality control. The market is not going to just let you profit off the direction of the candle close in the long run.

For example; Imagine using these rules in heavy consolidation, you would be flipping trades every day with building frustration.

But, there may be some merit to the idea if we introduce some other metrics and rules.

The theory goes like this: When you see a candle with a large, thick body – you generally do see good follow-through from price in the same direction.

A picture says it all… here is an overview of the success condition we are trying to measure:

Basically we want to know if a candle closes with a bullish body, what is the percentage chance we will see a higher close before a lower close.

Our stop loss for the experiment will be placed at the opposite end of the candle.

In other words, to be considered a bullish signal success, a candle must close past the ‘signal candle’ high before a candle breaks the opposite side.

Invert those rules for bearish conditions.

If a candle closes bearish, what percentage chance are we likely to see the lower close first.

Candles closing inside the ‘signal’ candle’s range are are ‘null’ event. We wait for either that explicit higher close, or lower close (past the signal candle’s range).

Lets check out how that looks in theory on the charts…

Above: In a bull run, this idea would thrive. A nice stack of bullish bodied candles would create a burst of lucrative trading.

The same goes for bearish runs…

A nice bearish waterfall would bring the profits up quickly.

But these are the text-book conditions for this strategy. How often can we expect these ‘picture perfect’ scenarios to pop up, and when are we going to know they will happen? – we don’t.

We can’t rely on being carried by a huge market rally every day.

That’s why it is important to start introducing some quality control metrics to be able to filter the good from the bad!

The Size of the Candle Body

One of the obvious, first measurements we can observe is how the candle body’s size effects the success / failure of the signal.

The body size should be a big deal – imagine a small doji candle vs a big thick bodied power candle. The difference between the two (I would imagine) would be quite dramatic – but you never know…

But what are we going to compare it with? We can’t measure body size against a hard set number, like body size compared to 300 pips.

The average trading range between markets changes dramatically. Gold can move 2000 points a session, making the static pip measurement a bogus reference.

But ahh… the Average Trading Range (ATR)!

We can measure the candle’s body size against the current Average Trading Range’s value.

That way we have a relative metric to measure the body size against which adjusts to market conditions .

If the market is pushing out some big candles, then the ATR will scale up and also scale down in slow conditions.

I decided to measure the candle’s body size vs the ATR as a percentage. Let’s consider the ATR was 50 pips:

  • If the candle body measured 50 pips, then the percentage would be 100%. Because the candle body is 100% the size of the ATR
  • If the candle body measured 25 pips, that’s 50% of the ATR
  • If the candle body measured 80 pips, that’s 160% of the ATR – representing a candle body that is larger than the current volatility

Alright so lets show some graphs.

Below is a success/failed histogram which illustrates the data with clarity.

The x-axis shows how the body size Vs ATR (20 period) affects the signal performance . Here is an example…

The bottom graph is my nicely color coded ‘probabilities histogram’ showing us where the strong advantages are in the data (if they exist).

Going by this graph, it seems there is a clear edge when the body size is above 85% of the ATR. However, if we look at the success/fail histogram above, we can see there are not many trades above 130%.

So the opportunity seems to be between 85-120% of the ATR .

But I’ve also added another observation on the chart, which is the ‘profitability threshold’.

When the bars are above the threshold, the system as a chance to do make money – the further above the line, the more likely it is to make money over the long term.

It uses the average return on risk for each bin range on the x-axis to establish how each x value range (the body size of the candle vs the ATR) affects profitability.

This example chart doesn’t look healthy, with most bars falling below the profit line (you can also think about this line as a ‘break even marker’).

Wait! Don’t throw down the hammer and make conclusions just yet – this is only the GBPUSD… there are many other markets to run the data on. Not only that, this is the 6 hour time frame – what about the other time frames?

I decided to include most of the swing trading time frames:

I also threw in the 15 min chart to satisfy the high frequency junkies (day traders) out there. I personally hate those lower time frames, but I will let the data do the talking..

For markets to run this strategy on, I picked a handful of different markets to save time on the data mining process (I would be here forever processing every single market & time frame variant).

Every Forex strategy will perform differently on individual markets. A strategy could be a big winner on EURUSD, but wipe an account on GBPNZD.

This spread of market will provide a nice variety, and a good idea on how the strategy performs across our ‘test basket’ of markets for a ‘general performance’ metric – we can always test on more instruments if the results are promising.

So let’s look at some graphs …

Raw Candlestick Body Size Vs ATR Performance

To avoid bloating the article with 100’s of graphs, we can consolidate data groups together to see if any nice metrics pop out at us. If they do, we can get more granular.

As I mentioned before I included the 15 min time frame… so lets start from the bottom.

Not expecting much magic from this low time frame data to be brutally honest with you.

Below is the consolidated 15 min data of all the test symbols to highlight the candlestick pattern strategy performance across the board.

As expected a poor result.

None of the candle body sizes are able to make it over the profitability line.

One correlation visible here is that the success chance increases as the body size of the candle gets higher.

You might be thinking: “Wait I see 60-70% win rates”. That’s true, the trades are hitting the ‘success condition’ frequently, but the reward is poor vs the risk taken.

Meaning each failed trade becomes very punishing to the system.

What about the 1 hour ?

Not really much going on for 1 hour either.

The 1 hour chart is not easy to trade anyway, the candles still don’t have much price action data within them.

Stepping it up a notch to the 4 – 6 hour range…

Only negligible improvements.

The candle body really needs to be 135% of the ATR to be able to flirt with the break even mark.

Finally, my favorite swing trading time frames – the 8H to daily charts…

Honestly I thought we would see some improvement here, however this data is really disappointing too.

The best of the worst seems to be the 4-6 hour range when the candle body is above 115% of the ATR.

For fun, lets run through a few back test results, and observe how the equity curve looks like on that data range.

Starting from the bottom, here at some 15 min time frame results…

Setting the minimum candle body size of 160%, as that was the only range that came close to the profitability line on the performance graphs.

As you can see the 15 min chart results would have brought tears to a grown man’s face if you let this system run on your live account.

Total trash results. The performance graphs shown earlier anticipated this.

Moving along to some 6 hour time frame figures. I am not showing every single symbol otherwise the article will be too bloated.

The min ATR was set to 115% this time, as the performance evaluation charts showed this is were the best performance started to kick in.

Sideways results as expected, as the performance charts implied this would happen.

None of the bars on the 6 hour data chart really cleared the profitability line, so break even was the best case scenario here.

Moving along to the daily – where I would usually expect cleaner results…

The daily results were the most stable so far, but still nothing to get excited about!

However, there was this one…

The EURUSD daily output was a pretty damn good equity curve. Just a candle body trader with a min input of 115% makes money �� !

Buzzkill: 10% account gain over the 3 year trading period isn’t impressive. Even though it turned a profit – it was a very slow snail system.

So what can we take away here…?

Checkpoint

Although we have high win rates, the reward output is so bad for each trade, we can’t get over that profitability threshold – causing stop outs in the system to be so destructive and therefore consuming all rewards + more.

This system is not viable with these very simple rules, even though the special case of EURUSD made a profit, it was still a very slow crawl with a few 6 month periods of no profits.

Introducing Moving Average Filters To A Candlestick Pattern Strategy

Now that we have established a ‘baseline’ for this experiment, we can try adding filters to see if they improve performance.

The moving average filter is the ‘go-to’ starter kit for a simple trend filter – attempting to scrub out bad trades, and let the good trades ‘with momentum’ bubble up as quality trade signals.

The simple rules:

  • Bullish signals that form above the moving average = pass
  • Bearish signals that form below the moving average = pass
  • Anything else is filtered out

I collected data on a nice range of exponential moving averages: 10, 20, 33, 50, 65, 100, 200.

I built a special performance comparison graph to help evaluate how effective the EMA filters are on the system.

The 20 EMA = usually a good medium term momentum filter. I also use it in my day to day trading – so I was interested to see what effect it would have here…

First run is through the 15 min data to output what performance change we would see with the 20 EMA filter added…

The conclusive graph here is the % Change bar chart in the top right.

This will tell us what effect the filter had on overall performance. In this case, hardly anything.

In fact, those slightly negative red bars, indicate the 20 EMA made the performance slightly worse than the baseline performance.

Let’s run the 8 hour to daily range data…

Some tiny bleeps on the radar, but overall a null effect.

This initial data is strongly suggesting the EMA filter does nothing to help the performance of this Forex candlestick strategy.

At this point, I thought it would be too boring to continue with posting individual performance graphs for every single EMA / time frame set.

To get more of a ‘birds eye view’ of how they effect performance, I designed this line graph below which has a lot more bottom line data crammed into one chart.

I only ran the 15 min data test on the GBPUSD as the re-running of the data mining for all these EMAs, for every pair is was too time consuming.

This is a measurement of 0-100 % of how much each EMA boosted, or harmed performance on each EMA period applied.

You can see very quickly there was no response from any of them!

What about on the higher time frames…?

Only some minimal boosts when the body size is over 150% of the ATR.

To be honest I was surprised to see such little effect out of the EMA filters.

This simple approach to trend filtering is used widely in the Forex world – so thinking forward for future tests, it will be very interesting to see if this is even a valid filtering approach at all.

Checkpoint

Candlestick Swing Highest / Lowest Filter

I usually just call this the swing filter.

Basically we want to check the candle’s high or low price to see where it fits within the surrounding candles.

We’re measuring these points to see how many candle highs our signal candle is higher than, or how many lows the signal candle is lower than.

A quick picture to demonstrate…

What I am measuring here is if the candle is sitting on a swing high, or swing low – if so, how significant is it?

A measurement of 1 means the candle is not on a swing high or low.

I also measure with these rules:

  • If the trade is bullish, measure the swing low significance
  • If the trade is bearish, measure the swing high significance

Why? Because I am trying to filter trades sitting on lower highs in a bearish market (after a bullish correction), and in a bullish market, measuring swing lows (after a bearish correction).

For swing traders, this is a valuable measurement.

Generally you would want a swing value of at least 3.

That communicates the candle has the highest high, or lowest low within the last 3 candles.

If we apply a swing filter value of 3 to this system, we get these performance responses…

Above is the 15 min data, and how a swing filter of 3 affects the performance.

One striking piece of data that pops out is the number of trades filtered out. The bottom right chart shows how many trades were taken without and with the filter.

So we’re suppressing a lot of trades! It seems to be worth it, look at the chart above it.

We’re getting 10-20% boosts in performance, which leads me onto the performance graphs on the left side.

Top shows the original, bottom shows the performance with the swing filter.

We can see some of the body size ranges pushing performance bars over the profitability line. Curious to see how it looks in a back test…

Above is a comparison back test on the GBPUSD 15 min chart.

Without any filters the system tanks pretty quickly, diving the account to $0 over the last part of 2020.

When we add the swing filter, the system doesn’t make us rich – but it does get a massive survival boost, and there is no account meltdown!

A simple swing filter stopped the account diving to $0 and also managed to hold ground until the end of the test period (3 years).

In conclusion the filter is having a dramatic effect on performance, but not enough to crank it into the profitability range.

So what happens when we run it on some higher time frames.

Comparing with and without filter tests on the GBPUSD doesn’t show anything impressive at all.

In fact the filter seems too strong in this context, with the filtered back test only taking a total of about 30 trades over the 3 year period.

The other higher time frames displayed similar results.

Checkpoint

Conclusions for this Forex Candle Strategy

This Forex candlestick pattern strategy is probably one of the most simple candlestick strategies you could think of, so my expectations were not high.

The data does show – the larger the candle body size, the more likely a higher, or lower close will follow.

Baseline back tests didn’t produce the ‘holy grail’ equity curve we dream of, but nor did we expect it too.

Throwing some filters on the system and evaluating their performance didn’t produce anything exciting either.

It was surprising to see all moving averages having zero effect on performance though!

That one back test on the EURUSD showed a nice equity curve… so there might be others in there.

I’ve included below a Forex robot for MT4 & 5 designed to trade this strategy – with the ability to customize a lot of the inputs. You might find some other markets which produce interesting results.

For my first strategy analysis, I think I will stamp this strategy ‘not practical’.

If you liked this kind of strategy analysis content, please let me know in the comments – so I know whether to continue publishing more tests!

I have a lot of ideas we can test, but there are 1000’s of strategies out there – so also in the comments below you can also let me know your thoughts on:

  • Other mechanical strategies to test
  • Trade Filter ideas

Thanks very much and look forward to reading your feedback.

Best of luck on the charts!

Download The EAs (Trading Robots)

Run the experiment yourself, and try on different symbols / time frames.

I have included lots of input options to tweak. who knows – you might find some profitable settings!

Disclaimer: These EA’s are not guaranteed to make you money. They are available to download for educational/experimental purposes only. They will however work as a fully functional trading robot on a live account – so use at your own discretion.

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