Monday, September 23, 2013

Week in Review: 16th September to 22nd September 2013

My account at IC Markets is live and open. Unfortunately my phone's no longer working, which has made it impossible for me to transfer funds into my trading account. I hope to get a new phone delivered this week. In the meantime, I've been playing around with a demo account, just testing new things. 

I spent the last few days researching retracements during a trend. I wanted to see how often candles can move up (or down) consecutively before a retracement in the opposite direction occurs. So, for example, if we have five bearish candles in a row, how often will the sixth candle be bullish or bearish?

Here's an example of what I'm talking about:

Since I'm stuck in demo mode, I decided to research the 5M chart for the AUDUSD, and compiled the following data. This was from the 2nd, 3rd and 4th of September, 2013.

The total sample size was 440 observations. So we can see that out of 440 observations, we have 220 "stand-alone" candles where the next candle would move in the opposite direction. We have 112 observations where we have two consecutive candles moving in the same direction before the third candle reverses. And so on.

The most interesting statistic is "% of continuation". What this means is, what is the probability of the next candle moving in the same direction? As an example, if we have two consecutive bullish candles, we have a 49.09% probability that the next candle will likewise be bullish. 

Up until four consecutive candles, it would appear that we have a 50 / 50 chance of a continuation candle. This is essentially a coin-flip.

However, it would appear that the chances of a reversal begin to increase once we hit five consecutive candles moving in the same direction. In this case, we have a 40.74% probability of a continuation (or a 60% probability of a retracement). Once we go beyond six candles, the probability of a retracement or reversal increase dramatically. However, we must bear in mind that my sample size of 5+ consecutive candles is very small. 

This information does not constitute a trading system. However, it can help in determining time-based entries and exits. For example, if you trade trends, you may want to close your trade after price has moved in your favour by four or five candles, and then look for a retracement to re-enter. 

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