Monthly Archives: June 2009

Forming a Bias

The following is some reader Q&A following publication of  Advanced Candestick Analysis (Part 1 of 2).

 

Question:

Hi Lance

Great article and of high value, I am impressed man.

Only one thing if I have problem from time to time with is: BIAS.

My trading suffers whenever I form any BIAS whether its for gap fill, target or still worse in a given direction (including of trend).

Psychologically speaking BIAS is something hard for me to change and remains in my thinking overruling, the current right side of the chart. Undermines my objectivity while trading.

Whenever I remain BIAS free, I manage to exit on time from the market and also do not try to impose my thinking of BIAS on the market.

What I have found is to have Preference till the prices allows you to have, supported by volume (no demand or spike).

Test of ones own Preference with price and confirmed by volume OBV (I use Moving Average 3 of OBV(9) for the eminis).

For me then its easy to prefer the trend & remain with it, but when direction differs (retracement or pullback) then the price and vol action would invalidate my preference and allow me to be in neutral state of both position & mind.

As trend most often continues than not, I allow myself to be aggressive in prevailing trend direction or conservative with change in direction & of existing trend. The neutral position to observe how easy the candle bodies are formed on which side is also quite important.

I use Haikin Ashi candles on the lower time frame chart for this purpose.

Higher time frame head wick and tails with lower time frame candle pattern and vol action is quite rewarding. But during Trends this patterns are also formed when prices/direction are working through an area or popular fib levels (trend continuation) giving misleading but weak signals (vol) in opposite direction.

Regards Minoo

 

Answer:

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Advanced Candlestick Analysis (Part 2 of 2)

 

Welcome to part 2 of our short article series on Advanced Candlestick Analysis.

If you haven’t read part 1, you’ll find a copy posted at this webpage: http://yourtradingcoach.com/trading-process-and-strategy/advanced-candlestick-analysis-part-1-of-2/

In the last article we reviewed some of the key concepts from basic candlestick analysis:

  • The importance of identifying the market context – where the pattern is happening within the market structure,
  • The importance of trading (primarily) with the trend – yes, a reversal pattern can also be applied at the end of a retracement, signaling continuation of the larger timeframe trend, and
  • The importance of understanding the probabilistic nature of the markets and the need for risk and money management to protect your downside.

 

We discovered that contrary to popular belief by those new to the industry, Advanced Candlestick Analysis (if there is even such a thing)* does NOT involve:

  • Better, and more secret, candlestick patterns, or
  • Some Holy Grail combination of western technical indicators and candlestick reversal patterns.

 

Instead, it simply involves seeing the flow of price in a whole new way.

I like to think of it as being like the Magic Eye books, posters and prints (http://www.magiceye.com/3dfun/stwkdisp.shtml) that became popular back in the 90’s, where to the uninitiated the picture was just a blur of color and shape, but through a slight refocusing of our vision the trained observer is able to see a hidden 3D image.

Thankfully, Advanced Candlestick Analysis does not require squinting or changing the focus of the eyes.

All it takes is an understanding that candlesticks are a visual representation of the bullish or bearish sentiment within the timeframe represented by that candle, and then using the power of questions to compare the current candle with those preceding it, in order to sense the changes in bullish or bearish sentiment as price flows from one candle to another.

We finished up last time with a small collection of sample questions, to help you see the changes in sentiment:

  • Is the current candle able to push beyond the previous candle high/low, in the same direction as the previous candle? Is it able to close in this area, or was the candle breakout rejected?
  • Has the candle moved beyond the previous candle’s high/low, against the direction of the previous candle? Is it able to close in this area, or was the candle breakout rejected?
  • How far does the current candle penetrate within the body (or the range) of the previous candle?
  • How far does price extend beyond the previous candle body (or range)?
  • How does the current candle’s range compare with previous candles?
  • Is there a long tail at either the high or low of the candle, and what is the significance of this price rejection?
  • How has price acted on reaching any significant areas, such as areas of support or resistance, previous swing highs or lows, previous day’s high, low or close, today’s opening price or opening range (or any other areas you deem to be significant)? Did the market accept these prices, or reject the area?
  • Is the momentum of the current price swing increasing or decreasing, especially as it moves towards the significant areas listed above?
  • Has this candle trapped anyone long? Or short? Or trapped anyone out of a position prematurely?

 

These of course are just examples, and can easily be replaced by any others which allow you to better sense the shift in market sentiment.

Ultimately, your aim is to answer the following question – “Does the current price action confirm my previous bias? If not, how is the sentiment changing and does that change my bias?”

Confused? Hopefully an example will help…

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Advanced Candlestick Analysis (Part 1 of 2)

Do you remember the feeling of excitement when you first discovered candlestick patterns?

Simple textbook patterns which promised to get you into every market reversal, right near the beginning of the move.

If you’re like most of us traders, you bought a book on candlestick patterns, or scoured the internet for the best of the free candlestick information (it’s here by the way – http://www.youtube.com/user/YourTradingCoach).

You spent hours practicing – scanning through historical charts and learning the patterns until you could see them in your sleep. Surely the funds from the uninformed masses would soon be flowing into your account.

And you may have even taken great delight in showing off your new found knowledge to your non-trading partner or friends. “Look at this dark cloud cover. See how it makes price fall. And here’s a doji. And this one here is called a shooting star.”

It all seemed so simple.

Then reality hits…

Somehow, when you’re trading live at the right hand edge of the chart, the patterns are not so easy to see. They never quite look as picture perfect as they do in the textbooks.

And even when they do look perfect, and you summon up enough courage to enter, the trade just never moves like it’s meant to.

That textbook hammer, entered on the breakout of the highs, suddenly reverses to retest the lows and stop you out, before then moving north again without you.

How do I know you’ve been through this?

Well, firstly, because it’s a stage we all go through. But I also know this because a lot of traders contact me, frustrated with their lack of candlestick success. They’ve worked through my basic candlestick analysis videos and are now hoping I can share with them the secrets of ADVANCED CANDLESTICK ANALYSIS.

Usually I just reinforce some of the key concepts from the videos:

  • Reminding them of the importance of identifying the market context – “Where is the pattern happening within the market structure?”

  • Reminding them of the importance of trading with the trend – reversal patterns aren’t just for reversals, they also apply at the end of a retracement as it resumes the dominant, longer term trend.

  • And most importantly, reminding them of the probabilistic nature of all setups, along with the importance of risk management to limit our risk as we operate in the uncertainty of the market environment.

 

But there is more to it…

So, let’s have a look at what I call ADVANCED CANDLESTICK ANALYSIS (if there is even such a thing!!!)

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