Engulfing candles that let us at least break even.

[Lewis Nicolson]

Hi team,

Heres a little something i did to help combat the fear of entering a trade based on the engulfing candle. It is not perfect, and may be a little inaccurate just because i might have missed some or added some in etc;

I also understand that I need to add more days to this to get a better and more accurate number since all of these were only taking starting from 23rd june to 6th july.

This is all based on a tight stop loss.

I wanted to check if the engulfing candle signal allowed the market to move in its direction enough that it meant that i would be able to break even regardless of wither or not it gained profit. So all I did was check that the 15min signal let the market move enough for me to move my stop loss above (or below) the candle to break even in my trade. The times i checked were between 7am to 6pm and i checked on 7 markets.

I would like to reiterate that this was strictly checking the signals, i didnt use DOR or MOR to help base a direction etc.it was strictly if the market between 7am to 6pm moved far enough allowing me to at least break even in the trade had i taken it regardless of any other indicator or direction etc.

Also it we need to take into consideration human error and timing meaning that we may have a missed a move being away from the computer

The results were favourable to us and are as follows.
GBPUSD – 68 engulfing candles. 37 englufing candles moved enough to take the stop loss to a break even. 31 did not.
EURUSD – 68. 38 candles allowed us to break even. 30 did not.
EURGBP – 66. 36 candles allowed us to break even. 30 did not.
USDJPY – 55. 29 candles broke even. 26 did not.
AUDUSD – 46. 25 candles broke even. 21 did not.
GBPAUD – 68. 30 broke even. 38 did not.
GBPCAD – 75. 45 broke even. 30 did not.

This meant that if we enter a trade using the 15min signal, most of the time, we are going to be able to bring our stop loss up (or below) to break even in our trades. A little over 50% of the time (apart from GBPAUD). In these trades themselves their are trades that take off to be highly profitable and some that only move enough to go up and then come back down to get stomped out at the break even point.

I’m not sure if this is useful information for you, but its helped me be more confident in placing trades when we start using our directional bias with DOR and MOR because regardless of what happens next wither or not it runs to make profit, it is more than likely going to move enough that it lets us break even.

(again, this may be inaccurate as i might have missed a number of engulfing candles etc)

Cheers! 🙂

Lewis

[Lewis Nicolson]

“Also it we need to take into consideration human error and timing meaning that we may have a missed a move being away from the computer”

i think i had a brain fart typing that out.

What i meant was that this doesnt take into consideration the likes of human error, or timing and other things like being away form the computer and missing the move etc.

[Martin Webber]

Hello Lewis (and everyone else!),

Thanks for doing this analysis on the engulfing candles. It is very useful as I am struggling to come to grips with using the engulfing candles or MA crossovers as a means of entering a trade. At the moment, I am back-testing (to October 2014) four or five markets, marking up support and resistance, Fibonacci and trend lines to see how the techniques have worked. As you can imagine this doesn’t leave much time, at the moment, for anything else but with all that is going on in the Euro, it seems like a good time to be doing this. I’ll let you know what I find. Eventually.

All the best,

Martin

 

[Lewis Nicolson]

Sounds good martin! 🙂

I will make sure that over the next couple of weeks i add more results to this. I know that only a couple of days is nowhere near enough time to conclude as results, but its a start!

Enjoy the back testing! 🙂

Lewis

[Rich Fitton]

Hi Lewis,

Great bit of data mining! I’m sure this will help a lot of traders take confidence in pulling the trigger so thanks for sharing 🙂

[DAVID KING]

Hi Lewis & Martin,

This is great research. While it is useful to see what percentage of candles get to breakeven, what if we worked out how many reach the same profit as the potential loss? If this is >50%, we have consistent profits, yes? And the same applies to the EMA entry points. Do you think this would be useful data? Anyway please keep us up to date with progress….

Dave.

[Lewis Nicolson]

Hi Dave,

Good idea, I will add this to the tally chart. I’m going to work my way through the whole of june today. I havnt started the 5min signal yet, I’ve just been focusing on the 15min, but will definitely get round to it eventually! 🙂

Cheers

Lewis

[Simon Dyde]

Good idea Lewis, and good numbers to back up your hypothesis.

Personally, I don’t use the EMA crossover (up till now!). I’ve tended to think the moving averages are inherent in the candles, but your idea is much more scientific and fits the ethos of quantifying the probability of success  very well. You are quantifying the chances of BE rather than just focussing on profit targets and the mix is a smart way to go in my mind.

I’ll defo have a look at this myself.

Regards,

Simon

[Lewis Nicolson]

Thanks Simon,

I’m just about to start from the beginning of june this afternoon. MUST.FIND.MOTIVATION. Hopefully we can start building a solid set of results together.

Cheers 🙂

[John Murphy]

Lewis,

Just so that I am clear could you run through how this works in practice. At what point would you move the stop loss to break even?

John

[Lewis Nicolson]

As i said this comes down to human error etc, so it is at what point ‘I’ would move my stop loss bar up, this will be different for everybody else depending on how aggressive they trade. For me, i like to leave a little room for the stop loss to cover my risk whilst giving it room to ‘breathe’, then i will use the price action to decide the rest of the stop loss movement on that trade.

Cheers

Lewis

[Lewis Nicolson]

When i get home i will give put a couple of examples up of how early (or late) i like to eventually move my stop loss up to break even

[DAVID KING]

Hi Lewis & John,

You have both read my mind with your latest posts. Assuming a trade does not swing the wrong way immediately, the stop loss could be moved to break-even very quickly. I am just thinking that we could avoid the ‘subjectiveness’ of each trade by looking at a 1:1 ratio. By this I mean, if an initial stop-loss is x pips away, a trade that reaches a profit of x pips.  But don’t let me get in the way of your good work!

Regards,

Dave

[Lewis Nicolson]

Yes, i will do it in a ratio of 1:1 and a ‘subjective’ break even however the only problem with a ratio of 1:1 is that i would tend to leave my stop loss on the tight starting point longer on smaller engulfing candles whilst the market picks up in that particular direction.

🙂

lewis

[Lewis Nicolson]

Hi guys,

Heres just some examples of engulfing candles where i personally would of moved the stop loss to break even. I’m probably a little more protective of losses which means missing out on times the market does move back to then roll over to winners. Overtime ofcourse I would like to find results of when is best to move the stop loss so that it takes emotion out fully.

(the last example isnt the best of engulfing candles, but it was just to show that i would of got put out that trade earlier than some who would of waited a little longer.)

When the market does move in my favour thats when i will start to use previous price action as my trailing stop.

Also, its hard to fully judge this because the market would be moving in real time when i place trades, so realistically i would probably wait for the candle to close first.

Yellow bar = stop loss

pink bar = Break even

black bar = when market had moved to here (when it closed) thats when i would then move my stop loss.

Hope that helps.

Cheers,

Lewis

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