Analysis on candles

Discussion in 'Technical Analysis' started by nooby_mcnoob, Jul 3, 2019.

  1. I saw someone doing this online so I figured I'd test out my use of a desktop wiki on it and thought it was interesting enough to post here if anyone else is doing the same analysis and had the same result (that there is no edge).

    P(crossed line2, given crossed line1) - median ~68%

    We know that there is a pretty large variance between currencies (p=0.65..0.75) for the probability with the highest median which is P(crossed candle body midpoint | crossed candle body bottom). That is:

    upload_2019-7-3_11-11-42.png

    This means that ~30% of the time, you will have price cross the previous day's candle body bottom, and of those times, 68% of the time you will cross the midpoint. Additionally, there is a 50% chance that when price crosses the previous day's candle body bottom, that it crosses the candle body top.

    So what we want to know is: on the days where we cross the previous day's candle body bottom, what is the distance between the previous day's candle body bottom and the candle body midpoint, and is there enough to make a profit?

    In fact, the median return on those days is 0.07% which translates to an expected value of 0.04% given the above probabilities. Interactive Broker's commission per side is 0.01% if you trade less than $1B/month. Assuming 0 slippage, that is an expected profit of 0.02%.

    So are there enough trades to make this worthwhile? In 3 years, it looks like the number of trades across all currencies that fall into this category would be ~300. With an expected profit of 0.02%, this works out to a (1+0.02%)^300 = 6% return over 3 years.

    Result: No edge.
     
    Last edited: Jul 3, 2019
    the learning guy likes this.
  2. dozu888

    dozu888

    the same is true for any kind of technical analysis without looking at the background context... nice analysis by the way..

    that's why I always say trading is about unfolding stories... play out a narrative as my pro boys play it then life is good lol.
     
  3. Hey that means a lot to me coming from you!
     
  4. Yup, curiously most price pattern stuff I backtested (in cases it didn't appear just random or otherwise unprofitable) yielded a really small positive return like 4-6% p.a, i.e. probably just below where professionals don't care about it. Amplifying it with leverage isn't worthwhile since Sharpe ratio is abysmal too and you just end up losing too much in down turns.

    Nowadays I basically consider price without additional data/context to be noise. I do think most people who claim to trade pure PA actually have a lot of other context built in their strategy that help them.
     
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  5. dozu888

    dozu888

    ha thx... good luck to you :)

    I'd even argue the price action itself is not that important in the sense that looking at a line chart probably gives just as much information as the candles... investor sentiment and narratives are the game.
     
  6. wrbtrader

    wrbtrader

    That's been my argument for +10 years whenever I meet someone that states they're a profitable pure TA or PA trader to imply they're using only TA/PA and nothing else.

    They're using something else that they do not discuss (intentional or unintentional) in combo with the TA or PA.

    wrbtrader
     
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  7. ducatista

    ducatista

    Can you clarify what you mean by narrative in this context? Any examples?
     
  8. dozu888

    dozu888

    I have a thread titled ‘trading is easy’. Outlining the way I read narratives:)
     
    ducatista likes this.
  9. looks like parametric stastitics and candle dimensions are not normally distributed so I am not sure it is accurate.
     
  10. What would it look like if it were?
     
    #10     Jul 3, 2019