Part 3: Advanced CandlePro Strategies

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Introduction

Part 3: To recap a bit first, in Part 1 of the strategy articles we looked at the advantages and limitations of CandlePro. Specifically, that CP is a powerful candlestick scanner, historical analyzer and all-around professional grade trading framework.

But within that framework of historical data, risk/reward ratios and 10-candle data it functions best when you integrate it with your trading strategy, and/or some simple filters/techniques to make sure you are only trading the best setups with a higher probability of success.

In Part 2 we looked four specific setup filters and strategies that can be used with CandlePro and analyzed the pros and cons of each:

• Basic – High Forecast Strength (HFS) – trade only signals that have a high forecast strength in CandlePro
• Basic – High Reward/Risk Ratio (HRR) – trade only signals with a high reward/risk ratio
• Intermediate – Trend Trading (TT) – Simple trend detection to filter signals
• Intermediate – Pullback Trading (PT) – Waiting for a pullback after a signal to achieve a higher RR ratio

This week we will take a look at four more strategies, a bit more advanced than the previous four:

• Advanced – Timeframe Confluence Trading (TCT) – trading a small timeframe (TF) chart within a larger TF framework
• Moving Average Trades (MAT) – using a exponential, simple, Linear-Weighted, and smoothed Moving Averages with candlesticks
• PipHut SR (PSR) – using support and resistance lines to trade, such as those used for the PipHut EUR/USD Daily Analysis

You can also combine and mix strategies together to come up with a trading plan that is suitable for you. we am a firm believer in developing your own plan because only after you dive into something, research it, backtest, etc. can you truly own that trading plan and follow it with full understanding of when to enter and when not to.

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Timeframe Confluence Trading (TCT)

This is a tried and true forex trading strategy and it just got a whole lot easier with the “Check Pair” button on the CandlePro search results.

In the standard form of TCT the forecast direction for the multiple signals all have to be in the same direction. For example, here is a good USD/JPY example where the daily and 4h signals are bearish while the shorter term 30m signal is bullish – if we wait for the 30m or 15m signal to turn bearish than we’ll have a nice entry signal as all timeframes will be aligned bearish.

To further the concept you can also use confluence to eliminate false signals. For example, if there was a 3 inside down pattern on the 1h charts, and then a 3 outside up pattern on the 30m charts, then obviously that 1h signal is not as strong as we thought it was.

This strategy can be used with any two or more time frames. Common time frame pairs are the 30m/60m charts, the 1h/4h charts, the 1h/daily charts, and the 4h/daily charts.

Many traders use confluence to confirm entry of daily candles before trading. For example, if there was a bullish hammer on the daily charts, with a decent RR ratio, we can confirm that trade by entering on a bullish signal on a smaller time frame chart such as the 4h or 1h charts.

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Moving Average Trades (MAT)

Moving averages are great ways to smooth out price action as they combine the average price over the specified number of periods. Moving averages are also nice because they are indicators that are very simple to use and understand (so they abide by the KISS principle). It’s good practice to use multiples of 5 on moving averages because those are the ones most commonly looked at and used by other traders. For example, a 10-day moving average or a 20-period moving average. A 19 period Linear-Weighted MA might look nice but you’ll be the only person admiring it :).

The key to finding a good moving average for your time frame of choice is to experiment with the multiples of 5 until you find the line that is being respected by the wicks on your chart, meaning that those wicks just seem to pierce that moving average or touch that moving average before resuming its trend. This is important and really the key to the whole system – if price is not respecting the MA (passing through it constantly, lots of candle bodies in the middle of an MA) then it is not a good setup!

Below is a good example of a moving average that is being “respected”:

Combining a MA with good candlesticks is a fantastic way to find high probability set-ups throughout the day. Let’s take a look at the example below:

As you can see this trade has a lot going for it (stacking the odds in your favor!) and this is the essence of price action analysis. There are two key items that help us to identify this trade opportunity: 1) the short term trend is down and 2) the moving average is being respected. We then have the price break below the MA, a pullback occurs followed by a bearish engulfing while the previous candle had a wick right through the MA.

These are the kind of things you should be looking for when performing price action analysis and especially for this strategy.

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PipHut Support and Resistance trading

Support and resistance are areas on the chart or price points where we expect to find buying and selling. If price action is moving down and we expect to see buying at 1.20, then we would describe 1.20 as a potential area of support. If price was moving up, and we expected other traders to sell at 1.30, then we would describe 1.30 as an area of resistance. Wait for candlesticks with strong RR ratios within these pockets of support and resistance to confirm a trade instead of just entering blindly.

For example, if we were expecting resistance at 1.30, a great confirmation would be to wait for a formation such as a 3 outside down pattern (or any solid candlestick signal), to confirm that resistance before entry.

This strategy can also be combined with any of the strategies described above (and we do personally combine some of the strategies discussed above), particularly using confluence to find good support resistance on higher time frame charts such as the daily or 4h and then looking for confirmation signals on smaller time frame charts to trigger your trade. Using moving averages on higher time frame charts as support and resistance levels is also a great strategy.

We feel it’s best to plot your own support and resistance levels, but there are a variety of sources out there to get support and resistance levels from. For example, PipHut’s free EUR/USD analysis is a great source of support and resistance for the EUR/USD pair.

Let’s take a look at some examples below from a recent EUR/USD signal:

As you can see we am looking at three main support/resistance lines. Any one of them could have provided the signal. From the last line of our analysis that day: “Finally a sustained break of 1.2670 on the 4h charts opens up 1.2600 as the next major support.”

Sure enough shortly after we got a major bearish engulfing candle that smashed through our 2670 support:

It also had a great RR in the performance report:

Now they don’t all work out this perfectly and that is why it is important to be picky, wait for the best setups and use your experience to guide you!

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Three simple steps to apply these strategies successfully:

1. Pick a strategy that fits your trading style the best. Combine a few different strategies, filters – it doesn’t matter, just start some where.
2. Start manually backtesting the strategy using CP and your charts to see how it would have performed for certain pairs and timeframes in the past
3. Apply those changes and backtest again. Repeat as often as necessary until you know the exact rules of the strategy that you will follow.

That is it. It is not rocket science, it is just hard work. Strategies can be as hard or as simple as you want them to be – the key is to choose the strategy that fits with your trading style and having confidence in that strategy via the steps outlined above.

Practice makes perfect and forex is definitely not an exception.

P.S. You should record your results in the CP forums for all to see! You will get valuable insight from the PipHutters as they review and comment on your progress and everyone will benefit from the sharing of ideas.

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