Q&A: 10-Candle Strategy and Drawdown
Understanding how CandlePro uses the 10-Candle Strategy and how drawdown is calculated within that system is key to really seeing through the system, and seeing through the system will ultimately help you utilize the tool better in your trading.
I’ve put together this Q&A to help everyone benefit from the answers I’ve given in emails and chat posts about 10-Candle Strategy and drawdown. Here goes:
Question #1 – Hey, I think the drawdown numbers are wrong in CP! When I look at the 10 candles after a signal it went down X pips and CP lists it as Y pips. What gives?
Answer: If you think there is a discrepancy then you should email me (firstname.lastname@example.org) so I can take a look but read this first: 99/100 times CP is functioning perfectly but you need to understand how the drawdown is calculated. The drawdown is the most the pair moved against your BEFORE hitting the 10 candle profit – anything after is discarded as the purpose is to know where to put our stop-loss to hit the 10-candle profit.
Question #2 – Why is it set up that way?
Answer: It helps to think about what we are trying to know: ON AVERAGE, how much does the pair move AGAINST (drawdown) our position before hitting the highest AVERAGE point in 10 candles (10-candle profit). If we were to take all 10 candles into consideration for the drawdown it would no longer tell us where to put our stop-loss to get to the 10-candle High, it would tell us where to put our stop-loss to get through 10 candles, regardless of what the 10-candle high is. Which isn’t very useful.
Question #3 – I’m still confused. What if it moved in your favor 30 pips first 5 candles then down 60 pips last 5 candles for a loss of 30 pips, is the candle profit 30 and drawdown 30?
Answer: In your example your 10-candle profit = +30. Your drawdown would be the most the pair moved against you BEFORE that fifth candle.
Let me see if I can draw this out with letters. Here is what I know from your example above:
X X X X +30 X X X X -30
Those ‘X’s represent the current profit of the pair. Let me add some values to that:
5 -10 0 20 30 X X X X -30
Now the drawdown is -10, because that is the most the pair moved against your BEFORE hitting the 10 candle profit (which it hit on the 5th candle ’30′).
Question #4: What if it moved up one pip the first candle then back down to entry and stays the the rest of first candle , then down 15 for the last 9 , since the first candle was the 10 candle profit level (1 pip) with out ever going against you, would that not make the drawdown 0 instead of -15?
Answer: Yes, that would make the drawdown 0 and the 10-candle profit +1. Not a very compelling candlestick setup!
Question #5: Doesn’t this skew the stats? Meaning that if this is the case if the price moves the right way just a little (before reaching any reasonable profit target) and then moves against you dramatically, CandlePro will NOT report any negative move that happens after the correct move, even if it’s within the 10 candle. However, if it’s the other way around, Candle Pro will report the dramatic correct move which went the correct way within 10 candle.
Answer: This would be true if we were only looking at one signal. The power of CP is that it gives us crunches the data on up to 50 previous signals and gives us all the averages/data which means that:
- If a pair does this often then the RR ratio (both median and average are provided) will be bad because 10-candle profit will be small and the trade wouldn’t be taken in the first place then
- This is also why I recommend looking at “past trades” in the videos – to confirm the pair has healthy profit levels
- This is also why I recommend using a SL for all trades (and as an experienced trader I’m sure I’m preaching to choir here) – because no trade is guaranteed and if it moves against you the max you should lose is your SL. Luckily CP analyzes the past signals to give you a good starting point of where to put your SL.
Question#6: I get it now!
Answer: That’s not a question, but great! Remember CP is great in that in crunches all of that historical data for you to make your trades smarter. As stated in all the launch material, user guide, etc., CP is not a strategy in and of itself – it is first a candlestick scanner and second a candlestick analyzer and the real power lies in its crunching of historical data. That historical data (i.e. the performance report) allows you to make smarter trades based off of candlesticks.
The 10-Candle Strategy in one sentence:
10-Candle Strategy tells us this: ON AVERAGE, how much does the pair move AGAINST (drawdown) our position before hitting the highest AVERAGE point in 10 candles (10-candle profit). Knowing this and understanding this helps makes better trades based off CP data.