Wondering if someone can help develop my candlestick strategy...

Discussion in 'Strategy Development' started by axiom49, May 24, 2007.

  1. axiom49


    Hi, new to the forums, been doing this for a while but have only discussed my strategy with one other investor... never thought to use a forum :p...

    I am a swing trader, and I tend to enter the market at EOD and get out the next day. How I choose which stock to go into is based on a blend of technical and candlestick analysis.

    I have had very mixed success over the last 4 months... in fact, my portfolio has been in a trading range for a while now, despite continued refinements, and I was hoping someone could help me flesh it out a bit...

    My strategy is as simple as I can make it... Out of all the candlestick patterns available, only two common patterns are statistically successful about 70% of the time... the hanging man and inverted hammer. They occur often enough that I can usually find at least two or three instances everyday.

    Once I've scanned for stocks that exhibit these patterns, I start looking for confirmation in oscillators, trendline analysis, technical patterns, volume, DMA, etc. Basically anything that strengthens or weakens the overall pattern comes into consideration. Then at the end of the day I decide on the pattern with the most confirmation and order into it (buy/short... lately I've done a lot of shorting).

    I am running into two problems...

    1) I have setup rather simple criteria for selecting the best inverted hammer/hanging man pattern available. Some criteria is more important than others, and so sometimes I ignore a few things if other indicators give strong confirmation. Sometimes I'm right, sometimes I'm wrong.

    2) My management of the stock during the day is downright terrible, I sell/cover at the wrong time usually... I use pure technical analysis during the day on the 5-min chart to make my decisions, but it definately needs some work.

    The first issue is something I can overcome with discipline and refinement of my trading criteria... If anyone thinks they can help me with this I'd like to share my decision making process with you later.

    The second issue is perhaps the most frustrating. I tend to pick stocks that almost always end up winners at some point in the day (even with the "bad" patterns from #1, they will be in the direction I want for a short time)... I just exit the order prematurely or too late. With some discipline I know I can probably get to the point where I'm on the winning side everytime, but to realize the full possible gain I could have each day, I have some questions I hope someone can answer.

    I developed this strategy completely on my own. I had some help a while back from a stock portfolio manager who guided me through technical analysis, and from that I launched off into candlesticks and have developed this hybrid strategy for making day-to-day swing trades. I can't imagine this is too terribly unique though and hopefully someone here knows what I'm talking about and can work with me on perfecting what I'm doing. Hopefully we can help eachother out to reach our goals :).
  2. If you want to encourage other stock traders to help...

    Your going to need to post lots of chart examples of your problematic trades so that they can see exactly what your talking about because the info you've provided does not shed light on what your doing that's wrong.

    P.S. I'm not a stock trader and just wanted to help get you going in the right direction.

  3. nkhoi

    nkhoi Moderator

  4. As someone that uses candlesticks, I would suggest considering more patterns than 2. I'm not sure where your 70% comes from and how it was formed, but there's plenty to be made from a variety of patterns.

    Just understand that hard coding a pattern is not always the best thing. Perhaps the easiest, but not the best.

    Good luck!
  5. Well, I don't trade stock and I don't use candles. But I learned that the more profitable candle setups are comprised of 2 or more candles. The OP indicates his method uses only single candle setups. Could this be a source of OPs problems?
  6. If you can master exits EVERYTIME, congrats, you have found the holy grail. Please let me know when you figure that one out.

    Please read "Trading in the Zone" by Douglas. Then read it a second time.

    NOTE: There's even a reference in that book to a study done a while back on a system with random entries and good exits. It was nearly profitable!

    A strategy with little profit and 70% wins is typical. A strategy with bigger wins 30% of the time and losers the rest can be just as profitable.

    Focus less on your system, and more on your mind. Trading for a Living by Elder is another book to read. But it sounds like Douglas' book would help more.

    Just my $0.02, and I don't give refunds. :)