This is my first post in a longer time. I won’t be posting regularly, as I’m still mostly focused on other things. Still, I wanted to share some work for the new year, based on something I actually studied over six months ago.
I’m referring to a
previous post where I suggested that trends can really give you an edge. Last July, I tried to show this with a simple analysis of Japanese candlesticks. Some of you who browse my older posts may have noticed I’ve been experimenting with classifying trend strength for a while.
First, it’s important to understand that there is no universal trend. Trend strength changes depending on the timeframe. I calculate it by taking the difference between the current price and the price
k ticks ago, then classify it into four downtrends (-1 to -4, with -4 strongest) and four uptrends (+1 to +4, with +4 strongest).
But there’s never just one trend - multiple trends can exist at the same time. A strong uptrend over a larger range may already have short-term downward moves, making it a poor moment to buy. Prices also can’t move endlessly within a candle due to the limits of active traders' capital. If a candle has already moved far, it’s more likely to retrace than to continue in the same direction.
In the chart below, the x-axis shows trend strength at entry, and the y-axis shows how far from the candle open I entered. I went long whenever the price was
x ticks from the open. Take profit was the expected average upper wick of the candle; a trade lost if the price fell to the open before the candle closed. Colors show the average probability of success.
Attached Image (click to enlarge)
Only the trend at entry matters. Even with many ticks left in the candle (before it finally closes), certain trends seem to push the price to the target. This is the second or third momentum effect I’ve observed.
There’s more: entering too late or in the wrong trend often means neither take profit nor stop loss will be hit. Collecting stats on these cases helps identify when it’s better not to trade.
Looking at the chart, I also notice that for very strong downtrends (-4), the short-term trend (the number after the slash on x axis) actually seems to improve the chance of success. I think this happens because the market over-sells, allowing a quick recovery. It’s very unlikely the market closes at -4 (or +4).
Please check everything for yourselves before trusting any forum member blindly!
