Candlesticks Discoveries Probability of Success Aug 6,...

The Art & Science of

Active Trend Trading

Candlesticks—Discoveries

Probability of Success

Aug 6, 2016

U.S. Government Required Disclaimer – Commodity Futures Trading Commission Futures

and Options trading has large potential rewards, but also large potential risk. You must be aware

of the risks and be willing to accept them in order to invest in the futures and options markets.

Don’t trade with money you can’t afford to lose. This is neither a solicitation nor an offer to

Buy/Sell futures or options. No representation is being made that any account will or is likely to

achieve profits or losses similar to those discussed in this training. The past performance of any

trading system or methodology is not necessarily indicative of future results.

CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN

LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT

REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE

RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN

MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN

GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF

HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY

TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

All Materials presented are for training purposes only . Traders should paper trade any new method

prior to risk of personal capital.

All Materials Copyrighted ATTS 2007-2016

Disclaimer

Candlestick History

Charting method originating In Japan between the 18th century & late 1800’s

Potentially used by Japanese Rice Traders

Introduced to Western Traders by Steve Nison in the 1990’s

Knowledge base and trading importance expanded by Steve Bigalow

Probability Studies By Thomas Bulkowski

What’s the Difference?

Bar Chart vs Candlesticks

Open

OpenClose

Close

Bullish Bearish

Low

High

Primary & Best Candlestick Signals

There are many, many Candlestick Patterns but these represent the Primary & Best, but do they

Indecisive

Doji's/Spinning Tops - Yes but are not trading triggers, 50-50

Bullish Bearish

Hammer Shooting Star

Engulfing Patterns -- Minor Lows ** Engulfing Patterns

Piercing Line Dark Cloud

** Morning Star Evening Star

Harami 50-50 Chance Harami 50-50 Chance

Inverted Hammer- Actually Bearish Hanging Man – Actually Bullish

Wicks, Size and Color Order

Golden Rule of Candlesticks

Candlesticks and patterns require four criteria for

proper interpretation:

1. A Completed Line (Must wait for the time period to finish!)

2. Location, Location, Location

3. Color

4. Shape, Size & Wicks

Revised Candlestick Basics

Candles and Technical Analysis go together

Powerful Tools – Only partially understood by most traders

When do candlestick patterns work best? Within established Trends

Size and Color Matters

Wicks Matter

Gaps are amazing

Bearish Candles outperform Bullish Candles

Focus on Patterns with 65% or better probabilities of success

Patterns tend to be valid for 5-10 days

2 & 3 Day Patterns have higher probability of success

Presentation Material by: Active Trend Traders

- Above the stomach – Like a Morning Star Reversal 67%- Belt hold bearish and bullish – 67% - 71%- Deliberation – Bullish Continuation 77%- Doji star, bearish – To Be Bullish close to 70%

- Engulfing, bearish – To Be Bearish 79%- Last engulfing bottom and top – Bearish at the Bottom- Three outside up and down – Bearish at tops 69%, Bullish

75% at bottom- Two black gapping candles – Bearish Continuation 68%- Rising and falling windows – Rising Bullish 75%; Falling

Bearish 67%

- Bulkowski, Thomas N.. Encyclopedia of Candlestick Charts (Wiley Trading) (Kindle Locations 1295-1304). Wiley. Kindle Edition.

Highest Probability Patterns

- Above the Stomach

- Theoretical: Bullish reversal.

- Actual bull market: Bullish reversal 66% of the time (ranking 17).

- Actual bear market: Bullish reversal 67% of the time (ranking 18).

- Frequency: 32nd out of 103. Overall performance over time: 31st out of 103.



- Belt Hold – Bullish and Bearish

- Theoretical: Bearish reversal.

- Actual bull market: Bearish reversal 68% of the time (ranking 16).

- Actual bear market: Bearish reversal 69% of the time (ranking 17).

- Frequency: 19th out of 103.

- Overall performance over time: 63rd out of 103.



- Belt Hold – Bullish and Bearish




- Frequency: 22nd out of 103.

- Overall performance over time: 62nd out of 103.



- Deliberation – Bullish Continuation


- Actual bull market: Bullish continuation 77% of the time (ranking 2).

- Actual bear market: Bullish continuation 75% of the time (ranking 4).

- Frequency rank: 48th out of 103.

- Overall performance over time: 93rd out of 103.



Bullish continuation

Bearish Reversal

- Doji Star – Bearish




- Frequency: 43rd out of 103.

- Overall performance over time: 51st out of 103.



Bearish Engulfing

Resistance

Theoretical: Bearish reversal.

Actual bull market: Bearish reversal 79% of

the time (ranking 5).

Actual bear market: Bearish reversal 82% of


Frequency: 11th out of 103.

Overall performance over time: 91st out of

103.

Bulkowski, Thomas N.. Encyclopedia of Candlestick

Charts (Wiley Trading) (Kindle Locations 6502-6507).

Wiley. Kindle Edition.

Swing Low

Copywrite ATTS 2007-2016

Bearish Engulfing

Bearish Engulfing

Clue: Divergent Stochastics

12.8%+ Gain from Signal to High in 6 weeks

What are the Clues?


- Last Engulfing Bottom


- Actual bull market: Bearish continuation 65% of the time (ranking 14).

- Actual bear market: Bearish continuation 67% of the time (ranking 12).


- Overall performance over time: 48th out of 103.



- Last Engulfing Top








- Three Outside Up








- Three Outside Down


- Actual bull market: Bearish reversal 69% of the time (ranking 15).

- Actual bear market: Bearish reversal 70% of the time (ranking 16).

- Frequency: 21st out of 103.




- Two Black Gapping Candles

- Theoretical: Bearish continuation.

- Actual bull market: Bearish continuation 68% of the time (ranking 10).

- Actual bear market: Bearish continuation 69% of the time (ranking 9).





Rising Windows

Swing High

Theoretical: Bullish continuation.

Actual bull market: Bullish continuation

75% of the time (ranking 4).

Actual bear market: Bullish continuation

72% of the time (ranking 7).

Frequency: 20th out of 103.

Overall performance over time: 42nd out

of 103.


Charts (Wiley Trading) (Kindle Locations 17128-

17133). Wiley. Kindle Edition.

Gap up


Rising Windows


Rising Windows

13%+ Gain from Signal to High in 4 Weeks

Rising Window

Clue: Stochastics Oversold

What are the Clues?How Many Are Needed?


Falling Window

Swing Low

Theoretical: Bearish continuation.

Actual bull market: Bearish continuation 67% of


Actual bear market: Bearish continuation 73%

of the time (ranking 6).

Frequency: 23rd out of 103.

Overall performance over time: 7th out of 103.


Charts (Wiley Trading) (Kindle Locations 17029-

17034). Wiley. Kindle Edition.

Gap Down


Falling Window


Falling Window

-19%+ Gain from Signal to 100 day SMA in 26 days

Falling Window

Clue: Stochastics Divergence

What are the Clues?How Many Are Needed?


- Bearish Reversals work best in a prevailing Downtrend on Pullups

- Bullish Reversals work best in a prevailing Uptrend on Pullbacks

Other Considerations

- Highest Probability Trades take place reactions during a Trend

- Other Highest Probability Trades take place at the bottom/top of consolidation

- Wicks

- Size & Color

- Gaps


- Wicks: Long Shadows and Tails tell exactly where buyers or sellers are coming in to the trade


Location LocationLocation Location

Location

- Size & Color: Larger candles are move predictive than Small Candles- Color change from Red to big Green candle- Color Change from Green to big Red Candle


Big Red Followed by Green

Green Followed by Big Red



Green Followed by Big Red Green Followed by

Big Red

Other Patterns I Like

Morning Star—Two Day Pattern

Hammer Support

Swing High Only occurs after a downtrend.

Body inside previous days candle

2nd up day closes at least ½ way up

candle from 2 days prior

Expected move back to swing high,

trend lines or moving averages


Morning Star

11%+ Gain from Signal to High in 2 Weeks13%+ Gain from Second Signal in 2 Weeks

Morning Star

What are the Clues?How many do we need?Does the Morning Star

really matter?


Bullish Engulfing—Two Day Pattern

Only occurs after a downtrend. Completely

engulfs the previous days body.

Expected move back to swing high, trend lines

or moving averages

Support

Swing High


Bullish Engulfing

Bullish Engulfing

Clue: Divergent Stochastics

12.8%+ Gain from Signal to High in 6 weeks

What are the Clues?


Piercing Line

Support

Only occurs after a downtrend. Must

open below and close more than ½

way up preceding candle.

Expected move back to swing high,


Swing High


Piercing Line

70%+ Move from Signal to High in 2 Months

Piercing Line

Clue: Oversold Stochastics

What are the Clues?


Dark Cloud

ResistanceOnly occurs after a uptrend. Must

open above and close more than ½

way down preceding candle.

Expected move back to swing low,


Swing Low


Dark Cloud

-9% Drop from Signal to Low in 2 days

Dark Cloud

Clue: Weak Stochastics

What are the Clues?


Candlesticks Discoveries Probability of Success Aug 6,...

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