Candlestick Reversal Patterns, Indicators, or Both?
This chart demonstrates beautifully how better results might be obtained by using candlestick reversal patterns instead of just blindly following a lagging indicator.
DISCLAIMER: This is not a trading strategy or plan that anyone should use out of the box. This is not investment advice, but please establish your own entry and exit rules for the securities you want to trade. And, ideally, back test, and forward test them.
EXPERIMENT: Here, I am using a triangular moving average (TMA) with standard deviation bands. I thought I was very original with my TMA. But it turned out to be very similar to the popular, Chris Moody's CM Ultimate. But the TMA has been around a long time, so that figures. Not to be outdone so easily, I thought I'd try and see what it looked like by adding bands. But setting up the parameters is very subjective. I chose a length that I think lines up best with the trends that I want to capture. Then I set the bands such that they encompass most of the price action. It's not like Bollinger Bands that pretty much work with default settings every time. If there is enough interest though, I will consider releasing the indicator.
Notice that even with optimum settings, identifying candlestick reversals could identify a change in direction prior to the indicator. Yet using an indicator like this does help me to identify where to look for reversal patterns. I want to see candles with long tails, or candles that reverse the high or low. I also want to look back for areas of previous Support and Resistance, volume, shorter candles, and trend lines to anticipate where a reversal pattern may occur. Consolidations inside the wide bands or near the moving average are other places to look. Multiple points of confirmation could assist in identifying where to look for good trades and stops that best fit the overall position sizing and trading plan.
Note: I am neutral on DOG because the pattern looks incomplete to me. At my level of experience, I like to see a bit more confirmation.
What do you use? Candlestick patterns, indicators, or some other combination? I am just getting started with this. But I hope this helps you in your endeavors. Keep looking through charts in addition to studying patterns to become a master at identifying these reversals. If you have any other ideas to improve, please let me know in the comments.
Here's to your success!
DISCLAIMER: This is not a trading strategy or plan that anyone should use out of the box. This is not investment advice, but please establish your own entry and exit rules for the securities you want to trade. And, ideally, back test, and forward test them.
EXPERIMENT: Here, I am using a triangular moving average (TMA) with standard deviation bands. I thought I was very original with my TMA. But it turned out to be very similar to the popular, Chris Moody's CM Ultimate. But the TMA has been around a long time, so that figures. Not to be outdone so easily, I thought I'd try and see what it looked like by adding bands. But setting up the parameters is very subjective. I chose a length that I think lines up best with the trends that I want to capture. Then I set the bands such that they encompass most of the price action. It's not like Bollinger Bands that pretty much work with default settings every time. If there is enough interest though, I will consider releasing the indicator.
Notice that even with optimum settings, identifying candlestick reversals could identify a change in direction prior to the indicator. Yet using an indicator like this does help me to identify where to look for reversal patterns. I want to see candles with long tails, or candles that reverse the high or low. I also want to look back for areas of previous Support and Resistance, volume, shorter candles, and trend lines to anticipate where a reversal pattern may occur. Consolidations inside the wide bands or near the moving average are other places to look. Multiple points of confirmation could assist in identifying where to look for good trades and stops that best fit the overall position sizing and trading plan.
Note: I am neutral on DOG because the pattern looks incomplete to me. At my level of experience, I like to see a bit more confirmation.
What do you use? Candlestick patterns, indicators, or some other combination? I am just getting started with this. But I hope this helps you in your endeavors. Keep looking through charts in addition to studying patterns to become a master at identifying these reversals. If you have any other ideas to improve, please let me know in the comments.
Here's to your success!