How Profitable Are Candlestick Strategies in Currency Trading?

In a couple of words…. they could be.

http://www.dailyfx.com/story/topheadline/How_Profitable_Are_Candlestick_Strategies_1195160706372.html 

Popularity: 3%

The MACD Is Overrated

I read a pretty enlightening article on the MACD today and how this indicator has been elevated to mystical status.  Is this deserving?  According to the author, no.  The MACD is an indicator based on moving averages; that's it.  "In the end, the performance of moving averages and indicators based on moving averages will always be, well, average." I personally use the MACD and I'll admit that I've been guilty of elevating this indicator to mystical status as well.  I predominantly use it to identify divergence between price, but I also use it to identify momentum.  

I've talked in the past about my avoidance of lagging indicators and the author of this article says that if this is the route that you want to go (I do), then here is what your toolbox should and should not be.

Your toolbox if you want to perform technical analysis in a lagging manner:

1. Moving averages
2. MACD
3. Stochastics
4. Parabolic SARs
5. Bollinger Bands 

Your toolbox if you want to know where price "is likely to go next… as often as 80% of the time."

1. Trendlines
2. Pivot Points
3. Candlestick

This article presents far from revolutionary information but it goes against from the norm and states why you would be best served by using something other than the MACD.   That is why I like this article.  There are just so many articles on how to use the MACD to your advantage.  

The author also mentions some candlestick patterns (hammer, star) that when identifying them when price is near pivot points or trend lines, can be more powerful.

Article: http://www.investopedia.com/articles/trading/06/AgainstMACD.asp

Popularity: 8%

April Issue of Currency Trader Magazine is Here

I love this online magazine.  There isn't anywhere else you can go to read a full-length magazine exclusively on Forex Trading.  In addition, the content is all exclusive and hasn't been seen anywhere else.  The April issue was just released 4 hours ago and contains the following top stories and more:

1. Battle of the Bucks (US Dollar vs. Canadian Dollar)
2. Top Forex Traders of 2005
3. Hedging Overseas Investments with the Dollar Index
4. Candlestick Reversal Patterns
5. Understanding Forex Supply and Demand

Content Removed: Download from http://www.currencytradermag.com

Popularity: 3%

Candlestick Studies for Next Week

I’m attaching a graphic of 8 currency pairs and their corresponding weekly candlestick patterns provided by Metastock software.  Going into next week, we see:

EUR/USD: Engulfing Bear
AUD/USD: Doji Star
EUR/JPY:  Engulfing Bear

 

 

 

 

Popularity: 4%

Playing the Odds with a Bearish Engulfing

The graphic below is the weekly EUR/USD chart with corresponding candlestick patterns.  As you can see, going into next weeks trading, we are following an engulfing bear.  Care to play the odds that this week will see more bearish action? Since 1999, here are the pip profit/loss if going short for the week following an engulfing bear:

 +51, +266, +21, +124, -58, +132, +38, +8, +11, +46, -10, +136

Out of 12 weeks, only 2 of the weeks were losing and they were small losses of 58 pips and 10 pips.  The average profit was 83.3 pips over the other 10 weeks. 

 

 

 

 

 

 

 

 

 

We could very well see another bearish week if we played the odds.  I know I will be.

Popularity: 4%

March Issue of Stocks & Commodities

I picked up a copy of the March Issue of Stocks & Commodities magazine this weekend.

There is an article that explains the use of candlesticks and moving average crossover as a strategy.  This is yet another setup strategy that I like for its simplicity.  As long as you can chart 2 moving averages and identify candlestick patterns, you can use it. 

The simple idea is that as moving averages crossover, the candlestick that forms during that crossover can be used to identify the possible direction of the market.

 

 

 

 

 

 

You can read a snippet of the article at http://www.traders.com/Documentation/FEEDbk_docs/ForexFocus/FOREXfocus.html

To read the full article, you need to buy the latest issue of Stocks & Commodities.

Popularity: 3%

Book Giveaway - Steve Nison - The Candlestick Course

Congratulations to Truett Neathery who answered all 3 questions correctly.  He wins a new copy of "The Candlestick Course" by Steve Nison.

1.   A doji in an uptrend is called a ___________?  

Northern 

2.   True or False? An evening star is a bullish candlestick pattern.

False

3.   (Select 1 answer) What were candlestick charts first used to predict in the 1600’s?

        a.    wheat prices
        b.     sushi prices
        c.     rice prices
        d.    currency prices

rice prices

Popularity: 1%

Candlestick Trading System

I came across this trading system on the web this evening. 

A free trading system, which if you are able to stick with and follow the rules, should produce substantial profits. It’s extremely simple and is based purely on price action. It is based on japanese candlestick charts. I will not cover candlestick basics as there is a ton of great free info out there already. As a starting point check out the chart education section at stockcharts.com.
 

 

 

 

The system is based around a candlestick pattern called an ‘engulfing pattern’. It is also know as an ‘outside day’ in western charting. The pattern in hilighted in blue in the chart above. It is a reversal pattern. Here is the description from stockcharts.com:

A reversal pattern that can be bearish or bullish depending upon whether it appears at the end of an uptrend (bearish engulfing pattern) or downtrend (bullish engulfing pattern). The first day is characterized by a small body, followed by a day whose body completely engulfs the previous day’s body.

Now for the entry and exit rules.

Use on 5 minute charts. Wait for an engulfing pattern to form capping off a clear trend.

Entry: enter on the close of the engulfing pattern. Place a stop 3 ticks above the high or low of the entry candle.

Exit: place a profit stop order at twice the distance of the stop loss order, so the risk reward is 2:1.

Popularity: 2%

Part 1: Forex Technical Indicators I’m Using

I’m going to go over the technical indicators I’ve been using over the last couple of weeks.  I’d like to get it down on "paper" so I can figure out how they can all work together and be one big happy family.

Indicator #1: Support and Resistance Lines 

We should all know what these are and how they can single handedly provide the direction of the market sometimes.  These are critical to my trading strategy and should be to most of you.  I use S/R Analyst Pro to automatically draw the trendlines for me.  This saves time and allows me to look for confirmation of these support/resistance lines using another indicator (If you interested in S/R Analyst Pro, do a search on my site and you’ll find a link to where you can get them a lot cheaper than from esignal.)

Indicator #2: Andrew’s Pitchfork 

I’ve grown to like Andrew’s Pitchfork and find it as yet another support/resistance tool.  You need three points to plot a pitchfork and are drawn from peaks and valleys.  This study used to be called the "median line study".  The median lines and the pitchfork can indicate support/resistance where prices tend to stall out or reverse.   This study is more useful in a trending market.

Indicator #3: Candlesticks

I find that I’m using candlestick patterns more and more each week.  Whereas before the candlesticks just looked like a bunch of red or green sticks with only 1 meaning (price up or price down), I’m starting to recognize certain patterns that I would have never seen before.  The more you use them, the easier it is for patterns to just pop out at you with minimal effort.  It’s like those pictures with hidden images in the them.  If you look at it long enough, you will see the hidden image.  Thereafter, the hidden image just pops out of the picture and you can’t believe you couldn’t see it to begin with.

[Click Read More to Continue] 

[Read more]

Popularity: 2%

Get a Free Copy of Steve Nison’s The Candlestick Course

I’m giving away a brand new copy of "The Candlestick Course" by Steve Nison, a $59.95 value (shipping included.)  All I ask is for you to answer these 3 Japanese candlestick questions and send the answers to rparedes@gmail.com.

1.   A doji in an uptrend is called a ___________?

2.   True or False? An evening star is a bullish candlestick pattern.

3.   (Select 1 answer) What were candlestick charts first used to predict in the 1600’s?

        a.    wheat prices
        b.     sushi prices
        c.     rice prices
        d.    currency prices

Deadline for Answers are Next Tuesday, February 14th at 12 noon.

Popularity: 1%

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