Trade Plan: Double Candlestick Reversal Trading candlesticks is a very common trading strategy for a lot of traders. However many of these candlestick patterns are at best a 50/50 proposition. Added with a poor PSR (Profit Stop Ratio), they often produce challenging results. In this post, we would like to offer a way to improve these results by setting these candlestick patterns in a larger scope of trade. We call this Trade Plan strategy the Double Candlestick Reversal. In this discussion please view a “reversal candlestick” as either a Doji, Hammer, or mirror bars, which are essentially the same when using candlestick addition.
Description: This trade strategy is basically trying to identify a reversal in trade direction and uses both “price pattern (for the Trigger)” and “price derived indicators (for the Filter).” The before trade set up conditions is to have two candlestick reversal patterns that occur within 5 bars of each other. The second candlestick reversal pattern should be higher/lower than the previous depending on the direction of trade. The two candlestick reversal patterns should be reasonably of the same bar lengths and the total two candlestick reversal patterns should be a total of 3x one candlestick reversal pattern. Now follow along the chart graphic provided as we describe the specifics using the Long case (the opposite is true for a Short case) for this Trade Plan.
Trigger: After the set up conditions are met, take entry on the break of the second candlestick reversal pattern.
Target: 1.5 to 2 times the Stop.
Stop: The Stop should be set just under the second candlestick reversal pattern.
Order Management: The PSR (Profit Stop Ratio) should be 2 to 1 or no less than 1.5 to 1 (STAY IN THE TRADE).
Filter: Always trade in the direction of the 15MA. For the best results, the MA should be reversing from against your trade direction, toward your trade direction and not just be oscillating in a trend-less manner. You may also want to avoid this strategy during major market news events.
One could consider using this on the 15 minute or the 1-hour charts, though other time series could also be considered if the risk amount of the Stop matches your risk budget tolerance. Please click here or see below for a video presentation of this Trade Plan.
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