The illlusion of candlestick patterns

[nunrgguy]

Hello Nunrg,

Really interesting thread. Not sure if you've had a chance to have a look at that post I sent you yet but here is an example on cable at the moment. It's a pretty obvious resistance becomes support level, so possibly worth watching.

View attachment 67262

If you look back an hour or so you will see an M5 'pin' bar (if you zoom in). Now I look at that and ask myself, what is important that is going on there? Is it the 'pin' bar or the level it is bouncing off? What is a pin par anyway - simply to me it's a pictoral representation of a 'v' shaped bounce off a level / fractal. In other words the important bit is the level. Q.E.D., why not just trade the level itself? Buy above the level and / or sell below with stops on opposing sides. The basic fact is that no-one knows what will happen next so the entry is pretty superfluous - it is how one deals with what happens post entry that will dictate whether the trade is profitable or not. My view on candlesticks is, whilst they work very well for some people (and I have no issue with that at all), they are intrinsically linked to levels. The danger is that, the higher the timeframe candle that we trade off, the further price will probably be from the level which triggered the formation of the candle and, therefore, the higher the risk in terms of stop distances etc. That's before getting into such details such as the very formation of a candle, price acceptance and rejection as a function of time etc.

To me, it's the level that's key. The further you enter a trade from where price bounced off a level, the more possible likelihood that price will go your way, but, with this supposed increase in likelihood, comes an increase in risk as logic dictates that your stop must always be the other side of the level.

Not sure if I have explained myself particularly well and I may just be echoing what has been written earlier in your thread.

BTW you may have noticed from the chart above that I don't look at candles at all. All I am interested in is price extremes.

All the best
Rob

:clap: That's really what I'm getting at. I've no doubt there are people using their 'skill' to make pinbars etc work. Is skill a system?
It's the level and orders around it that's important I think. If a pin bar forms on the four hour, great but the way I see it is you should already be in.

 

[Bloodhound]

If a pin bar forms on the four hour, great but the way I see it is you should already be in.

100% agree!! That's not to say that someone trading an H4 pin is wrong - it's just a different way of skinning the cat IMO - horses for courses etc.

 

[Bloodhound]

BTW - you might find this post interesting in terms of 'why' people like trading with candles, indies, candle patterns etc.....

http://www.trade2win.com/boards/forex-strategies-systems/75950-trading-naked-47.html#post950238

 

[Black Swan]

yeah candlestiks rulz te interwebz

 

[Shakone]

Candlesticks are utterly meaningless, we break time into random segments, but price doesn't recognise these segments.

I have to disagree with this completely. Something is only meaningless if it has no meaning to anyone. If I take a daily candle, are you suggesting that yesterday's high, yesterday's low and yesterday's close have no meaning to anyone? Nonsense. Yesterday's high and low ARE a form of resistance and support. Not only that, but people DO play pin bars, people do play bearish outside bars, inside bars etc. It has meaning to them, and that means it has meaning. A bunch of people deciding to enter at a certain point has meaning. After all that is what Support and Resistance give you too. For me a weekly candle can be pretty important, as can a daily candle. When you get into the lower time frames they are less important in my view, but a pin bar represents price moving a certain direction and then reversing within whatever timeframe you are looking at. There is no illusion there. A bullish candle means price is going up. What is the illusion?

How you play these candles or bars should vary depending on what time frame you're looking at too. If you see a Bearish outside bar at the top of an uptrend and you are thinking of going short, who says that you should go short just on the break of the bar? Maybe you should go short after a retracement of 50% of that bearish outside bar, maybe you should let it retrace to the nearest resistance level and then short. If you think that you can just play any bar on a break no matter where that bar is in relation to support and resistance, then you're missing something.

I completely agree that they will get you in late, but people going with the trending will get in late and get out late, but they can still make a profit. I don't think pin bars are the best way to trade, but when you're learning they give you a decent (but not optimal) entry, and perhaps more importantly a decent place to put your stop. It is certainly a good start.

If you don't believe pin bars work, fade them. Enter against the the break of that pin, set your target as the nose of the pin, and see how you do.

 

[nunrgguy]

A bullish candle does not neccessarily mean price is going up. It means it already has gone up. It may continue, it may not.
Someone mentioned elsewhere too that when that same candle closes all orders from the big players are complete...errr...why are they?

 

[Bloodhound]

Hi Shakone,

A very thought provoking post and I hope you don't mind me throwing some ideas in? Not in any way meant to be argumentative, in fact quite the opposite.

All the best

Rob

I have to disagree with this completely. Something is only meaningless if it has no meaning to anyone.
Interesting point!

If I take a daily candle, are you suggesting that yesterday's high, yesterday's low and yesterday's close have no meaning to anyone?
In a market such as UK equities you are completely correct. The problem I always come up against is that in FX (as the OP originally was talking about) when does the day begin and end?

Nonsense. Yesterday's high and low ARE a form of resistance and support.
Not just a form support and resistance - I would say they are key levels, but one doesn't necessarily need a candle to show yesterday's high and low.

Not only that, but people DO play pin bars, people do play bearish outside bars, inside bars etc. It has meaning to them, and that means it has meaning. A bunch of people deciding to enter at a certain point has meaning.
Totally agree but do these people playing pin bars (for instance) have any bearing on price movements in something like GBPUSD? If they don't then surely one could argue that, whilst the pin bar may have meaning to them, it's meaning in the broader context of the market place is diluted by the bigger players whose influences on FX rates may have nothing to do with trading (in the sense it is alluded to here).

After all that is what Support and Resistance give you too. For me a weekly candle can be pretty important, as can a daily candle.
Agreed, providing the rest of the market are in agreement on what constitutes the start and the end of the period. Otherwise, price extremes may be more important?

When you get into the lower time frames they are less important in my view, but a pin bar represents price moving a certain direction and then reversing within whatever timeframe you are looking at.
I would tend to disagree but that is more because I believe that levels of support and resistance (supply and demand) are what influence price, not the reactions to those levels, as those reactions are after the event so to speak.

There is no illusion there. A bullish candle means price is going up. What is the illusion?
I would say there is very definitely an illusion as candles do not graphically display the time element. By that I mean the length of time that price may be accepted or rejected at a certain level. One would always need to drop to a lower timeframe to get more information

How you play these candles or bars should vary depending on what time frame you're looking at too. If you see a Bearish outside bar at the top of an uptrend and you are thinking of going short, who says that you should go short just on the break of the bar?
How do you know it's the end of an uptrend?

Maybe you should go short after a retracement of 50% of that bearish outside bar, maybe you should let it retrace to the nearest resistance level and then short. If you think that you can just play any bar on a break no matter where that bar is in relation to support and resistance, then you're missing something. Totally agree - it's the levels that count IMO

I completely agree that they will get you in late, but people going with the trending will get in late and get out late, but they can still make a profit. I don't think pin bars are the best way to trade, but when you're learning they give you a decent (but not optimal) entry, and perhaps more importantly a decent place to put your stop.100% agree with you about this. I'd go one step further and say that they taught me to ignore them and learn about levels. Everywhere one reads that it's not about the 'pin' bar but the level it is trading off. Q.E.D. ignore the pin bar and just trade the level? It is certainly a good start.

If you don't believe pin bars work, fade them. Enter against the the break of that pin, set your target as the nose of the pin, and see how you do.

 

[Shakone]

Yes true, I should have typed it in past tense nunruggy. Support and resistance may hold, and it may not. There are no guarantees here. But there are also no illusions. Price went up. Pin bar signifies a possible reversible. Look for the pin bar, then ask yourself why that pin bar appeared. Maybe it is there because of strong support. If it hit strong support and formed a pin bar, and then that pin bar breaks, what are the chances of it getting to the first area of resistance. I'd say from experience, a pretty high chance. On any given support or resistance level when price is coming down to hit it, what are the chances that it will bounce and go all the way back to the next area of resistance? I'd say not nearly as high, but you have the advantage that you got in at a much better price.

If you can accept the greater amount of losses when it just blows straight through support, then play it that way. If you prefer to trade with a higher probability of success, use the bars. If you're a truly superb trader, you might be better off playing straight off the support level, because you know better when to get in and when to get out.

 

[Shakone]

Hi Shakone,

A very thought provoking post and I hope you don't mind me throwing some ideas in? Not in any way meant to be argumentative, in fact quite the opposite.

All the best

Rob

Hi Rob,

for FX, while perhaps it doesn't have a close (although some people do choose a closing time for calculating floor trader pivots), there are enough people looking at the daily bars (whether you're in US or UK) that they have strong meaning. You're entirely right that you don't need candles (or bars because they are the same info) but on a daily chart, if you have a pin bar off support, and then it breaks through the top of yesterday's high (resistance as you agree) then price has just told me that we had a possible reversal yesterday, and now it has broken through the first level of resistance. That's all it says to me, but that is still important and suggests there is a decent chance it is going up and probably to the next area of resistance (at least). Particularly with weekly candles, I believe UK and US sees the same thing, right?

Do these people have a bearing on price movement? I would say collectively yes, but I believe it is more about what the pin bar signifies (i.e. the reversal) than that a break of the pin bar will suddenly skyrocket because of people with orders there. At the end of a swing high or swing low, regardless of whether you play them or not, they are noticeable, as is often an outside bar. By its nature it stands out. My setups aren't based on pin bars, but I do notice them and I definitely don't fade them.

I agree with you on the lower time frames, I have a daily chart, I have an hourly chart and I have a 5 min chart. I just meant with respect to candles or bars breaking, in that I don't consider a 5min pin breaking to mean that much. Whereas a weekly pin breaking is a lot more significant - to me at least.

 

[nunrgguy]

Yes true, I should have typed it in past tense for the pedantic. Support and resistance may hold, and it may not. There are no guarantees here. But there are also no illusions. Price went up. Pin bar signifies a possible reversible. Look for the pin bar, then ask yourself why that pin bar appeared. Maybe it is there because of strong support. If it hit strong support and formed a pin bar, and then that pin bar breaks, what are the chances of it getting to the first area of resistance. I'd say from experience, a pretty high chance. On any given support or resistance level when price is coming down to hit it, what are the chances that it will bounce and go all the way back to the next area of resistance? I'd say not nearly as high, but you have the advantage that you got in at a much better price.

If you can accept the greater amount of losses when it just blows straight through support, then play it that way. If you prefer to trade with a higher probability of success, use the bars. If you're a truly superb trader, you might be better off playing straight off the support level, because you know better when to get in and when to get out.

As yet I don't know if there are a greater amount of losses from just playing the level but what I've been experimenting with (on a long) is not just placing the order when price is arriving from above. I wait for price to retrace to or THROUGH support, if it starts to come back with decent momentum it signifies to me that stops are being taken out from any shorts. I'm then looking at entering slightly above the support level to go long with the price moving in my direction, placing the stop underneath the nearest low...almost like a slingshot action I suppose.

There may be more failure trades doing this, I don't know as yet, but they will be much much smaller failure trades than if you take a big picture of a candlestick on the break. Very often the price does continue on from these patterns but then fails at minor resistance, which would be your first target or problem area. Opening your trade puts your entry much nearer this potential area of resistance, limiting potential reward. Your entry is also much further away from your stop, increasing risk...a double whammy. The only other thing to consider, which I don't yet know the answer to is probability of the two different entries failing to come good...how and when you move your stop to break even is another thing to consider, on the smaller trade you should be able to move to b/e almost immediately if you're right whereas with an entry taken higher up you might expect more of a retrace therefore having to leave more risk on the table for longer.

 

[oildaytrader]

Hi

The candles I use are on hourly charts.Readers of candles need to know what the candles are telling you about the strength or weakness of the instrument.

If u look at the chart of the DAX below , the candles are saying a lot about the market.At least I can read a lot.Even an automated program can read a lot about the candles.

Even my new expert advisor below on the Dax breakout system can read a lot about the candles.

It took me hundreds of hours of training how to reading candles properly ,to realise what the candles are saying.

Its not just the candles,but s/r,trend lines ,timing,sentiment,supply and demand info the candles are conveying.

Maybe the answer lies in how you read candles and how you use them.

I only need candles to work 50% of the time and not work 50% of the time ,added with positive expectancy they give profitability.

 

[Shakone]

What you're doing sounds find to me nunrguy. I think if you play that properly you can make money. In my experience levels of support and resistance fail quite often. In fact maybe they are more useful when they fail, a bit like with trendlines. Also in my experience, with daily bars breaking they very often make the next area of resistance. This might only be 30 pips away and your stop might be 100 pips away, so it sounds terrible. but the probability is quite high so your stop goes to breakeven then, and then if it breaks through that level, you've got yourself a runner.

It is a personal thing how you want to trade. I don't trade pins because I don't like to sit and watch price come back through my entry too far and I like tight stops 20 pips or less. I like it to go my way very quickly. But I don't fade pins because I have seen that it will usually hit the next area of resistance at least before it takes out the stops below the nose. At the end of the day it is just information, and up to you how you profit from it, but whether you think they work or not, a lot of people will notice them. That in itself means something

 

[Bloodhound]

In my experience levels of support and resistance fail quite often. In fact maybe they are more useful when they fail,

It is a personal thing how you want to trade. I don't trade pins because I don't like to sit and watch price come back through my entry too far and I like tight stops 20 pips or less. I like it to go my way very quickly.

Totally agree. Just a quick thought on candles and levels. If you highlight a support level (for instance) you could place a buy at the level with spread times 2 or 3 (9 or 10 pips) as your stop, or trade the candle formed off that level an hour later with a close 90-100 pips from the level and a stop of 90-100 pips. Which is likely to be more profitable over the longer term?

 

[HawkTrader]

Totally agree. Just a quick thought on candles and levels. If you highlight a support level (for instance) you could place a buy at the level with spread times 2 or 3 (9 or 10 pips) as your stop, or trade the candle formed off that level an hour later with a close 90-100 pips from the level and a stop of 90-100 pips. Which is likely to be more profitable over the longer term?

I think it's just these candlestick trader's are looking for as much confirmation as possible. But the longer you wait the less pips you make? That's an arguement for another time!

 

[Bloodhound]

I think it's just these candlestick trader's are looking for as much confirmation as possible. But the longer you wait the less pips you make? That's an arguement for another time!

TBH I think it's pretty relevant to the OP's original question / thoughts etc. I have no idea what the answer is btw, except in my own trading to date but what works for me won't necessarily work for anyone else!!

 

[HawkTrader]

TBH I think it's pretty relevant to the OP's original question / thoughts etc. I have no idea what the answer is btw, except in my own trading to date but what works for me won't necessarily work for anyone else!!

I just meant I'm too lazy to write anymore.

 

[gamma]

I see candlesticks as depecting price behaviour rather than patterns than pan out.
In the same way bars could be subsituted.looking for price patterns is an ardeous tedious job which does not give satisfaction.
I have been using candles to help me understand price behaviour for 10 years and have always found them very useful.

 

[virtuos0]

I have to disagree with this completely. Something is only meaningless if it has no meaning to anyone. If I take a daily candle, are you suggesting that yesterday's high, yesterday's low and yesterday's close have no meaning to anyone? Nonsense. Yesterday's high and low ARE a form of resistance and support. Not only that, but people DO play pin bars, people do play bearish outside bars, inside bars etc. It has meaning to them, and that means it has meaning. A bunch of people deciding to enter at a certain point has meaning. After all that is what Support and Resistance give you too. For me a weekly candle can be pretty important, as can a daily candle. When you get into the lower time frames they are less important in my view, but a pin bar represents price moving a certain direction and then reversing within whatever timeframe you are looking at. There is no illusion there. A bullish candle means price is going up. What is the illusion?

How you play these candles or bars should vary depending on what time frame you're looking at too. If you see a Bearish outside bar at the top of an uptrend and you are thinking of going short, who says that you should go short just on the break of the bar? Maybe you should go short after a retracement of 50% of that bearish outside bar, maybe you should let it retrace to the nearest resistance level and then short. If you think that you can just play any bar on a break no matter where that bar is in relation to support and resistance, then you're missing something.

I completely agree that they will get you in late, but people going with the trending will get in late and get out late, but they can still make a profit. I don't think pin bars are the best way to trade, but when you're learning they give you a decent (but not optimal) entry, and perhaps more importantly a decent place to put your stop. It is certainly a good start.

If you don't believe pin bars work, fade them. Enter against the the break of that pin, set your target as the nose of the pin, and see how you do.

I take your point about a candle marking the open/close/high/low, I'm not arguing that these values may have significance, but it doesn't take a candle to trade these values, they are independent or candlestick charting. Whereas it does take candlestick charting to trade a bearish engulfing pattern or whatever.

Candlesticks are meaningless in the sense that observing certain candles, say for example a pinbar, gives you no edge. As has already been pointed out by myself and a few other posters it is the fact that price has moved to and away from a particular level that is potentially an edge..very potentially!

Imagine for a moment that you have a chart up, and you have a 'slider' control that allows you to move into any timeframe you wanted, say for example you could push the slider along and move the chart from a 60min chart to a 61min chart to a 62min chart and so on. Now take any old example of price moving down to, and then rejecting, a level. I bet that on your 60min(H1) chart that won't look like a pinbar, it could look like any old combination of candles. Now if you were to slide the scale along and the candles simultaneously alter to then fit into that timescale at some point you would have yourself a flawless pinbar. Who knows whether that would be a 52min chart or a 92min chart, but you get the picture.

 

[robster970]

I use candles because they are the prettiest to look at and for a discrete time period, tells me everything I need to know about that period. In isolation they are useless (falling star, rising bear, angry chicken, whatever).

You can model continuous signals discretely and still have a fair representation of what's going on. This is the whole basis for digital signal processing which pervades practically every aspect of our lives, TV, CD's, Internetz, etc

What is in question is the interpreter of this discrete information and if you, the trader are a rubbish interpreter of the discrete information that is presented then it's going to come out all garbled and meaningless. A bit like if you were a really cr@p cd player - would you blame the CD for the sound quality even though it's able to provide discrete information at 384kb/s?

Do you sing to the main tune of the song or spend your time listening to stuff up at 20kHz?

 

[virtuos0]

I use candles because they are the prettiest to look at and for a discrete time period, tells me everything I need to know about that period. In isolation they are useless (falling star, rising bear, angry chicken, whatever).

You can model continuous signals discretely and still have a fair representation of what's going on. This is the whole basis for digital signal processing which pervades practically every aspect of our lives, TV, CD's, Internetz, etc

What is in question is the interpreter of this discrete information and if you, the trader are a rubbish interpreter of the discrete information that is presented then it's going to come out all garbled and meaningless. A bit like if you were a really cr@p cd player - would you blame the CD for the sound quality even though it's able to provide discrete information at 384kb/s? Do you sing to the main tune of the song or spend your time listening to stuff up at 20kHz?

I also use candles because they are the prettiest to look at, I'm with you on that one.