A candlestick is not a setup, but just a representation of OHLC. But if you refer to candlestick pattern, some of them work quite well, others do less, as they are exploited.
If you have a working setup (as Toby Crabel had or the Turtles had), at some stage this will induce predators which feed on this type of setup. One setup of Linda Raschke is called Turtle Soup. Guess on which traders this setup feeds. Richard Dennis, when interviewed by Jack D. Schwager for his book "Market Wizards", had stopped trading altogether, as the time of trading turtle style breakouts was over. Of course, this does not invalidate the original strategy, but markets are more difficult today, so you cannot trade that on its own, as was possible 20 years ago.
I have seen quite a number of candlestick pattern not working well. They only work, if placed in a specific context, combined with analysis of support and resistance or volume analysis.
I think that the same applies to inside or narrow range bars. Just blindly following those will possibly not give us any edge. It would be to easy. So you need to add something to get an edge. Even Toby Crabel saw this 20 years ago, when he tried to defined a preferred breakout direction.
Obviously you may disagree with this. I do not mind. Trading is a zero sum game, so I do not want anybody to agree with me.
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That is not efficiency. I responded to a prior post with light sarcasm. This made me replace the inside bar with a hindsight bar, and unfortunately this idea developped into a serious concept, something which I had not foreseen.
Maybe, when posting here, I look for two things at the same time
- education and
Trading is quite a boring occupation, if you simply follow your rules. There is a bit of distraction here and some fun.
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Backtesting has a major shortfall. It only allows you to evaluate an idea or system, and optimize it over various parameters and instruments. System means a set of rules, definining a setup, filters, one or several entry conditions (scaling in, pyramiding), exit conditions, money management rules, etc. The setup, entry and exit conditions may depend on price, volume, time of day, order book, market depth of underlying (index futures), correlation with other instruments, etc.
But before evaluating something, you need to create it. This can only be done by observing the market, you need to spend some screen time. The screen time should be well spent. So the question is what to look for.
R- Multiple and Win Rate
When I enter a trade, I do not know the probability that my trade will be a winner. The markets are nonlinear dynamic systems, and it is quite complex to have a set of criteria to calculate the win rate. But stop loss and profiit target are both part of my setup. While I have no idea of the actual probability that my trade becomes a winner, I can select my trades to achieve a favourable R-Multiple.
After the market has closed, I can apply the hindsight indicator, which checks for each single bar of my chart, whether a defined stop loss (you can use a fixed value or ATR multiplied with some factor), a profit target (R times the stop loss) or neither (for the last bars) was hit first. You mark the bars, which would have allowedthese favourable entries.
Know your indicators
I have a few favourite indicators that I am used to. I could easily replace them by a set of different indicators, it does not matter. But once you selected your indicators you should stick with them. So what I want to learn from the daily visual review is, which of the combinations of my indicators at which time of the day will allow me for a favourable setup that meets my requirements in terms of R-Multiple. Once I have generated a combination that does empirically well, I can backtest it. But backtesting is only an exam, after you have done your homework.
I will think about the subject and maybe create a separate thread, when it is mature.
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Well put . Its the consistent application of an idea/strategy/method through all market conditions and phases that causes the true potential of that idea to surface . Then you can tweak it or change it because theres proof that those changes are needed and can enhance the idea .
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