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This is Part 2 of a 3-part article on combining CandlePro with other trading strategies.
Part 1 – Introduction, Forex Strategies 101, Five Necessary Components of a Successful Strategy
Part 2 – the Psychology of Executing a Plan and Four Basic Stategies to use with CandlePro
Part 3 – Four Advanced Strategies to use with CandlePro
Welcome to Part 2 of the CandlePro Strategies Article!
As you can see this article has turned from a simple couple page article into a full-blown tutorial/multi-page beast. It is now counting many dozens of pages, dozens of images/graphs, etc. Now this is a good thing for everyone as the more details that are provided the better but I’ve had to chop it up again to keep it manageable. In this section (Part 2) we’ll look at how to introduce a trading plan into CandlePro, the basic trading steps of a CP strategy, and, of course, four Basic and Intermediate trading strategies using CandlePro.
The THIRD AND FINAL (I promise) part of this article will be out this week and will include four additional Advanced and High Probability trading strategies to use with CP. Sorry to chop it up again but, like I said, this really is the best for everyone in the long run as you get the most amount of info in the best format. Additionaly I’ll be releasing this as a PDF for CP Pro users to download and print for reference.
Table of Contents
1 – Introduction: Using CandlePro withhin a Trading Plan
2 – Fundamental Steps
3 – Four Basic and Intermediate Trading Strategies using CandlePro
4 – Four Advanced and High Probability Trading Strategies
5 – Psychology of Properly Executing a Trading Plan
The Nine Strategies we’ll look at in this article:
1) Basic – High Forecast Strength (HFS) – trade only signals that have a high forecast strength in CandlePro
2) Basic – High Reward/Risk Ratio (HRR) – trade only signals with a high reward/risk ratio
3) Intermediate – Trend Trading (TT) – Simple trend detection to filter signals
4) Intermediate – Pullback Trading (PT) – Waiting for a pullback after a signal to achieve a higher RR ratio
5) Advanced – Timeframe Confluence Trading (TCT) – trading a small timeframe (TF) chart within a larger TF framework
6) Advanced – Moving Average Trades (MAT) – using a exponential, simple, Linear-Weighted, and smoothed Moving Averages with candlesticks
7) High Probability – Maximum SL (MaxSL) – high probablity, low RR trading system
8) PipHut SR (PSR) – using support and resistance lines to trade, such as those used for the PipHut EUR/USD Daily Analysis
9) Your own system!
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Introduction: Using CandlePro with a Trading Plan
A trading plan means you are selecting in when you choose to trade and when you choose to sit on the sidelines. It is another way of being patient and disciplined in the heat of the markets as you have defined criteria that must be met before you will take action on a trade. The goal, of course, is to increase profitability by taking only those trades that are most likely to end up in profit. CandlePro provides critical historical information candlestick formations/signals that can form the bedrock of a number of profitable forex strategies.
First time users of CandlePro, and new traders in general, have three options with how to get started in the forex markets:
Option 1: Choose an existing cookie-cutter strategy that fits with your trading lifestyle
Cookie-cutter strategies are always the least profitable as there are too many people using them. I don’t believe forex is a zero-sum game but it certainly feels like it sometimes: they is always someone bigger and badder than you ready to take your money. Luckily by using the data from CandlePro you are already one step ahead of the curve. Very few traders have easy access to this kind of invaluable historical data so you are already on a level all by yourself.
Option 2: Customize an existing strategy
This is when you add an extra ‘twist’ to an existing strategy of your own personal design. For this category that ‘twist’ is probably in the form of a technical indicator (moving average, fibonacci, etc) or more advanced (e.g. multiple timeframe and pair confluence).
Option 3: Create a new one!
Most of the time this means modifying an existing strategy to the point of being completely different, but sometimes you can get pretty creative creating your own rules as far as when you will enter or when you won’t.
The key here is that no matter which one you choose you will be ahead of the curve with CandlePro. Using CP with another strategy is like upgrading to GPS after using a paper map for years – you are still going from Point A to Point B but it is a heck of a lot easier!
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The 4 Fundamental Steps
With each strategy listed below there are certain basic steps to the trading plans that are repeated in each strategy. I refer to these as the “Fundamental Strategies” and refer to them throughout this article so don’t forget them! You can add to or modify the these rules as you see fit, but these are the basics I recommend you start with:
Step 1 – Identify CandlePro Signals to Trade
This will change from strategy to strategy as you might be looking for something different in CP. For example in one strategy you might focus on the Reward/Risk ratio while on a different strategy you only care about the direction (bullish/bearish) of the signal.
Step 2 – Confirm Trade
Using some common sense when looking at the charts can go a long way. Is the candlestick in a good location in relation to the trend? If I’m trading with the trend then is the trend strong?Is the pair stuck in a range? Are there any news events coming up?
Step 3 – Compare recommended TP and SL to Chart
The TP and SL of CandlePro are part of the power of that analytical engine: it compares and analyzes the past candlesticks (up to 50) to give you the average drawdown, profit and more using the 10-candle strategy. Some simple tips to improve this step are:1) SL should beyond the highest/lowest wick of the candle formation. So for example the SL should be above the wick of the shooting star or below the low wick of a hammer. 2) TP should be a reasons S/R level.
These numbers should ideally match up with the recommended Max TP and Min SL given by CandlePro and allow for a positive reward/risk ratio.
Step 4 – Trade
This one is self-explanatory!
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Strategy 1: High Forecast Strength (HFS)
Use TP and SL with only high forecast strength signals.
This is better than the previous strategy where you look to trade every signal that pops up in candle pro because CP’s forecast strength attempts to take into account some basic items such as where the candle appears in the short term trend and the overall formation of that candle. For example: a hammer will have a high forecast strength if it appears lower than the candles preceeding it. As the hammer is most significant as a reversal signal.
Step 1: Find Signal in CP
Notice the forecast strength (100/100) and the chart snapshot showing a picture-perfect shooting star after 3 bullish candles (the first of which might be a hammer).
Step 2: Look at Chart to Confirm Signal Strength
On this larger view we can see the signal has a lot more going for it:
- Good uptrend for the past 130+ hours*
- Preceded by 3 bullish candles*
- wick of Shooting Star is above all other wicks*
- far away from moving average that has been
respected (signals possible trend exhaustion)
- bearish body is slightly better than bullish body
* denotes items that CP’s “Forecast Strength” takes into consideration for its score. The “moving average” is not included because finding the MA that is being respected is a manual process and “bearish body…” is not included because there is no evidence that one body color is better than another.
Step 3: Compare Recommended TP and SL to Chart
Recommended MAX TP is 87 pips and MIN SL is 45.6 pips. If we take a look at the chart from Step 2 above we can see there is good 4h support near 1.2990, which is about 72 pips away (within the recommended 87 pips) and the top of the wick is 44 pips away, so if we set the SL a few pips above this (50 pips away) for just a little bit of breathing room then we are above the recommended minimum SL of 45.6 pips.
See how those recommended numbers match up nicely with what is presented on the chart? This is the ideal setup.
Step 4: Trade
It takes 20 hours, but this strategy nets us 70 pips.
Strategy Tips:
- Ideally the SL should be beyond the wicks of the signal (e.g. above a shooting star or below a hammer wick), the TP should be at a Support/Resistance level, and those both should be within the recommendations of CandlePro.
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Strategy 2: High Reward/Risk Ratio (HRR)
Use only signals with a good RR ratio
As we all know reward/risk ratio is an extremely important component of a successful trading plan. Reward/risk ratio tells us the amount we are hoping to gain versus the amount we are risking on a trade. For more information on risk reward ratio please see our “money management article”.
The only part of this strategy from the previous strategy (use signals with high forecast strength) is Step 1: instead of finding CP signals with high forecast strength we’ll find signals with high reward/risk ratio. This can be found in the Performance Report of a signal. Lets take a look at the average and median RR ratio for a signal below.
Step 1: Identify high RR signals on CandlePro
Take a look at this reward/risk data for a hanging man on the GU 30m charts (and the results on the right-hand side):
Pretty good! The high RR ratios give us confidence that this signal has a higher correlation with profitability (meaning it is more likely for us to end up in + pips). The rest of the steps are the same as above (Fundamental Steps): 2) look at the chart to confirm, 3) compare recommended SL and TP to charts, 4) trade.
Strategy Tips:
- RR ratios should be above 2:1 at a minimum.
- Ideally the average RR and median RR should BOTH be above 2:1
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Trend Trading
Trend trading is one of the most time-tested trading strategies still around today. Instead of trying to picks highs and lows we look for the direction of the overall trend and then look for entry signals that align with that overall trend.
Lets do an “eyeball check” on the following chart example:
See how price moves from the top left to the bottom right of the chart? This is the clearest sign that the pair is in a downtrend. Conversely when price moves from the bottom left to the top right that it is an uptrend. If the price doesn’t appear to be moving up or down then that is called a range – trend traders don’t trade when price is ranging.
Pro Tip: We prefer the 4h timeframe to determine the trend – it is large scale enough to offer more accuracy, but small enough of a timeframe to still capture shorter-term market mood swings.
CandlePRO makes trading trends a snap.
Take a look at the following CandlePRO signals which occured during the downtrend shown above:
There were four candlestick signals total: two bullish and two bearish. Since the trend from above chart was bearish we will ignore the two bullish signals (which would have resulted in losses) and traded the two bearish candles which could have netted up to 370+ pips (with very little downside!).
Pretty simple, eh? To make it even easier we even put a trend gauge on the CandlePRO results themselves – take another look at the signals above. Keep in mind this is the trend according to technical indicators of the timeframe of the signal – not the 4h timeframe that we recommend starting with. We also always look at the charts themselves for the “eyeball check” we described in the first part of this article.
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Pullback Strategy
Pullback Strategy: a “stupid simple” way of getting a better entry price for your setup while also giving you a “buffer” against false signals. This “delayed entry” strategy lets the price go against the forecasted direction for a set amount of pips before entering. For example if a bullish candlestick signal occured at 1.2050 a trader might wait for a 50 pip “pullback” and buy at 1.2000.
CandlePRO (part of the PipHut PRO suite of trading tools) makes trading candlesticks + pullback strategy drop-dead simple: the pullback strategy is built in complete with TP and SL data! All you have to do is click the “Backtesting” button on any candlestick signal and you’ll see extensive backtesting for multiple pullback levels to help you enter quickly and confidently!
Take a look at this AUDUSD CandlePRO 1h “Bullish Engulfing” signal:
Notice the “Pullback Strategy” category, complete with TP and SL data? The top result shows TP = 62 pips, SL = 16 pips and Pullback Entry = 18 pips.
Here’s a look at the chart for this signal:
The pair retraced 24 pips before making its big move upward – with our pullback entry of 18 pips and our TP/SL of 62/16 this signal would have resulted in a quick 62 pips for you!
SummaryThe pullback method is great because the markets naturally have an up and down, ebb and flow to them, and pullbacks are very easy way to take advantage of that natural flow. If no pullback occurs then no trade is entered and you keep your equity for another trade!
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