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Do Candlesticks Really Work???

 
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JS



Joined: 19 Jul 2006
Posts: 8

PostPosted: Wed Sep 20, 2006 11:58 am    Post subject: Do Candlesticks Really Work??? Reply with quote

A loaded question? Probably so, considering the name and subject of this forum. But I do ask for a reason. Back in August, after finishing reading the two books and subscribing to TeleChart, I built my candlestick scans according to the candlestick signal pcf's found on one of the free pages of the website. After doing so, I did an experiment in which I ran a scan for each signal and then saved the results of each those scans to a watchlist. So, I would have a watchlist for each signal ("Bullish Engulfing Signals 8/.../06, "Bullish Kicker Signals 8/.../06, etc.). What that gave me was a complete list of all of the signals for that one particular day. And, the scans were built according to the recommended parameters (minimum $5.00 per share, stochastics below 20 for buy signals and above 80 for sell signals, etc.). What I didn't do, though, was to go through the lists and look for any of the confirming factors mentioned in the books, such as volume, sector performance, how the stock opened the next day, etc. Basically, all I had was a list of, for example, all of the bullish engulfing signals with stochastics below 20 for that day, and the same with all of the other signals.

A few weeks later, I went back and examined all of those lists. To my surprise, what I found was that not many of the signals led to what would have been profitable trades -- certainly far less than 75% or so quoted in the book. Maybe even worse, the signals that did lead to positive moves led to only small moves -- usually around 2-3% or so. In other words, it looked like the probabilities were NOT, in fact, in my favor. And again, this wasn't with an analysis of the confirming factors. These were complete lists of all the possibilities I had to choose from, and as it turned out, there would have been very few right choices. Particularly disappointing, by the way, was the kicker signal. The books indicated that these frequently lead to relatively large and lasting moves, but all of the ones on my list for that signal fizzled.

Still, this was only one day, and a day in the heart of summer, no less. So, right after Labor Day, I erased the original lists I created and created new lists, thus repeating the experiment and in a better time of year. Unfortunately, however, I got pretty much the same results. I would love to hear what anyone else has to say about this. Is it consistent with your experience with this method of trading, or have you witnessed better performance from these signals? To sum up, the fact that these signals are said to have worked for 400 years is nice, but I still need to see it to believe it, and right now, I'm just not. Are you?

Thanks.

-JS
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candlestick1
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Joined: 27 Jun 2004
Posts: 503
Location: Houston, Texas

PostPosted: Wed Sep 20, 2006 12:57 pm    Post subject: refining the analysis Reply with quote

The analysis made need to be a little bit more refined. Will a bullish engulfing signal be correct in all market conditions? Definitely not, a bullish engulfing signal in an oversold condition in an obvious downtrend
may only indicate a very short-term bounce during the downtrend. That bullish engulfing signal would have much different results if the overall trend of the stock and/ or the market was in an uptrend and there had been a recent pullback of the stock price.

The candlestick signals illustrate a change of investor sentiment in the current trend. A little more analysis is required as far as which way the trend is moving, is a bouncing off a major support level, which direction of the markets in general moving. That is why there has really not been a quantitative statistical study done on the results of candlestick signals. The number of parameters that needs to be incorporated into the study will mushroom dramatically.

The ease of using candlestick signals is that it can be visually evaluated in all factors that may influence the price of the stock. The market indexes can be visually analyzed very quickly, adding that information to the evaluation of a specific signal. You are on the right track though.

We are currently in the process of performing back studies of specific signals with different parameters. As those results occur, we will be making them available to the candlestick forum members
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JS



Joined: 19 Jul 2006
Posts: 8

PostPosted: Wed Sep 20, 2006 3:25 pm    Post subject: Reply with quote

Candlestick1,

Thank you for the insights. Interestingly, it was in fact a very rudimentary quantitative statistical study that I suppose I was attempting to do. As stated, mine didn't work out so well, but I would be eventually interested in hearing the results of the more refined back studies you mentioned at the end of your post.

I guess that what I take from your comments is that context matters in candlestick trading more than what I had been expecting. I thought that a bullish engulfing signal with stochatics under 20 had a 70-75% or so chance of giving me a good trade, but I guess that that's not the case. Maybe I was just getting my hopes up that it would be that easy, but realistically, I realize that very few things are. At any rate, with what you said in mind, I'll keep trying to make them work for me. Hey, I certainly HOPE they do! Thanks again.

-JS
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ninner



Joined: 17 Feb 2006
Posts: 167

PostPosted: Thu Sep 21, 2006 12:33 am    Post subject: Reply with quote

i think this summer was pretty tough to make money....last summer at least a few stocks went up i believe energy was at least doing well and there was HANS and TIE and NTRI which u could trade with regularity...this summer alot seemed to be going sideways.


cheers
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drunnels



Joined: 09 Feb 2006
Posts: 23

PostPosted: Thu Sep 21, 2006 10:33 am    Post subject: My initial experience Reply with quote

Here's my 2.
I too did a very rough statistical analysis when I first got involved in candlesticks. I did a scan for bullish engulfing and filtered it down to 100 stocks, I don't remember, probably by volume and price. The next day only 25 of the 100 went up again. I too was very disappointed and left a post here. But it was a down day for the market, many if not most of the engulfing patterns weren't near short term bottoms, so stochastics were all over the place.

Candles need to be analyzed in context. I still am no where near an expert on using them, but I have experience and I am always looking at what candle is forming near overbought/oversold areas for my FIRST impression of what's happening. I pay special attention to candles forming near Bollinger Bands and moving through moving averages and I also look at trending indicators to complete the picture. The problem with using other indicators is that they are almost always late in identifying an entry point, while the candle is right there in front of you.
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ninner



Joined: 17 Feb 2006
Posts: 167

PostPosted: Thu Sep 21, 2006 3:02 pm    Post subject: Reply with quote

I try to use a combination of things....candlesticks along with bar charts and consolidation patterns with price and volume action.....i find that they work better that way.

all the best

ninner
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JS



Joined: 19 Jul 2006
Posts: 8

PostPosted: Thu Sep 21, 2006 4:46 pm    Post subject: Reply with quote

Thanks to those who have thrown in their comments. The only concern I have is that I was hoping to keep things as simple as possible. It just seems like the more different indicators I add, the more convoluted my trading system gets. That is, the more things have to line up perfectly, and the more chance there is for contradiction. The tradeoff for that, I hope, is an increased likelihood of a positive trade when one does meet all the criteria. Not the "Holy Grail" -- I know that doesn't exist. Just something with a positive expectancy. Of course, I'll only know if this is the case through further observation, which is something I'm obviously going to have to do.

-JS
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drunnels



Joined: 09 Feb 2006
Posts: 23

PostPosted: Fri Sep 22, 2006 9:53 am    Post subject: Reply with quote

Don't litter your mind trying a lot of different stuff. Stick to the basic dozen candlestick patterns, look for support and resistance.
I also verify that my signal is a low risk idea, i.e. I don't chase 'em, but try to get in at proper entry points. Remember also that the exit can be more important than the entry.
Keep it simple, learn, maybe sign up for Steve's service.
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ChickenHawk



Joined: 24 Apr 2005
Posts: 247
Location: Houston, Texas

PostPosted: Fri Sep 22, 2006 11:20 am    Post subject: Reply with quote

JS

Don't give up!

It took me several months before I felt comfortable using the Candlestick method. In the beginning, I recall having identical results where only a small percentage of patterns seemed to work and had many of the same questions you are asking now.

Be patient!

Keep studying the charts patterns, attending the Stock Chats (or downloaded and review) on a regular basis. Practice, Practice, Practice. And, soon, you will discover the simplicity of using Candlesticks that will work in your favor.

JDSU is a frequently mentioned stock in the stock chats. On 9-12 I bought at 2.17. Basically, I liked the morning star, J-Hook pattern, stochastics turning up on the 12th and it seemed the perfect time to jump in.
Since the 12th, the trading has been relatively flat with another J-hook pattern with nice support at 2.15 and I am hanging on for now.

The 20 MA and 50 MA appear to be merging soon and with the Dow and Nasdaq in a tight channel, it's bound to break one way or another - hopefully to the upside!

There is a large gap to fill and stochastics have plenty of room to the upside. If the trend happens to go down the morning star signal should be the 2nd support level, and not too far from the 2.15 which would be a small loss.

A weekly chart also looks fairly good with potential to the 2.57 range - that would be an 18% move! Not too bad! All-in-all, I feel comfortable with this trade and have set a goal of 10-12%. If the trend goes up as expected I would only sell at a profit if the candles tell me to sell.



What made me interested in buying this stock?

The large gap down, the morning star, stochastics oversold and turning up.

Was it rocket science?

No, just a few candle patterns and common sense! Remember! "The candles tell you what the investors are thinking at any particular point in time!" If only I could remember, Who said that?....Just kidding Steve!

Good Trading Laughing
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msl



Joined: 03 May 2006
Posts: 13

PostPosted: Fri Sep 29, 2006 12:36 pm    Post subject: Reply with quote

JS,

Don't feel alone. I have not run the testing you have, but in real time testing (ie paper trading), I am still losing more than winning using candlesticks. I will say, however, that my trading has improved after reading Mr. Bigelow's first book. I am currently into his second.

Also of iterest is the fact that in following the stock chats about a month behind, as I usually do, many, many times when Mr. Bigelow says that he would be a buyer on strength the next day, he would have gotten a fill the next day and shortly thereafter would have posted a loss. I have added a trend strength filter to my candlestick analysis. When that filter shows a strong bear trend, I do not enter a buy order even on a very good candlestick signal with stochs. in the oversold area. In following Mr. Bigelow's suggestions about entry in the stock chats, I have found that filter works very well at preventing many losses on trades that he says he would be a buyer on.

Other than the stochs. filter, and the trend strength filter, I have not been able to come up with any other "indicator" that seems to make candlestick signals more effective.

Mike
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