Just my 2 Candles worth!


Well-Known Member
Essentially looking at a system for positional trades in NF and trend following at EOD. Whenever I looked at trends on NF, I noticed that in an uptrend you rarely get two consecutive bearish candles which are broken the next day, and in a down trend you rarely get two bullish candles which are broken on the third day. When they are broken it generally signifies a trend change. This is based on purely PA with no indicators.

1. Set Up: Look for two consecutive candles of the same color. Two bullish or two bearish. Bullsih candles are where the close is higher than the open and bearish candles are where the close is lower than the open. The difference between open and close must be at least approximately .001% of the price to qualify as a candle. If NF is trading at 4800 levels, the difference between open and close should be around 4 points to qualify, otherwise treat it a a doji and ignore it for this system.
Logic:The idea is to see if either bulls or bears clearly dominated the last two candles of any TF.

2. Hidden Direction: Bearish close candles with long tails (bigger than body) obviously show that the bulls dominated the session even though the close is bearish. Converse holds for bullish candles with long wicks at the top. For out purpose they are bullish and bearish candles respectively even though the close belies that.
Logic: Close alone does not tell us who dominated and dictated the price for the session, the long wicks tells us what the color of the candle is not.

3. Entry: Long the break of the higher high of the two consecutive bullish candle, short the lower low of the two consecutive bearish candle. The entry must happen on the candle following the the two consecutive candles else the trade is not on. The third candle must break the range otherwise ignore the trade and wait for fresh consecutive candles of same direction.
Logic: When the third candle does not break the range, then momentum is missing and direction has become uncertain.. Wait for it to build up again.

4. Initial Stops: For longs, the lower low of the two consecutive bullish candles and for shorts the higher high of the two consecutive bearish candles. Taking out of stops is not a sign of reversal.
Logic: SL is the beginning point of the move and break of it tells us that the setup has become void

5. Exit: When reversal takes place or when SL is hit or when trailing SL is hit.

6. Trailing Stop Loss: This will kick in only when you get a trend in your favor. If the market trades flat after entry, hold on to the initial SL or have a time stop that suits you.
Logic: If the maket goes flat after your entry, keeping your SL at the initial point will prevent whipsaws. At no time is the SL shifted beyond your initial SL

7. TSL for longs/shorts: Count back to the low lower than last candle low. On a daily frame, count back to a low lower than yesterday's low. For Shorts, count back to the high higher than yesterday's high.
Logic: This comes from observation. You can refine it to suit your risk appetite.

8. WRB (Wide Range Bar): When you are long, and you get a WRB in your favor, then ignore the bearish candles that form within the shadow of the WRB. The bearish signal should come below the low of the WRB. Same holds true for a bullish bars in a down trend. Or the market should move away (in time) sufficiently from the WRB to negate it.
Logic: Market often reacts after a WRB but it does not necessarily mean change of direction.

9. Adds: Once the trade is in profits, add can be considered when the signal for the trade is generated again: break of range of consecutive bars in your favor.
Logic: Since you are on the right side of the market adding to winners.

10. Modification of initial SL: At the time of entry, if the intial SL is very wide when the two consecutive bars are of wide range, modify the SL to suit your risk appetite after having backtested for the instrument you are trading. For NF back test suggests a 2% of entry price or the initial SL mentioned in point 4, whichever is less works fine.
Logic: To prevent large scale losses when the setup starts with WRBs

11. Setup at Gaps: When two consecutive bullish bars are made and you are ready for an entry on the third day morning to go long over the higher high and the market opens with a gap up above the higher high, what do you do? Go long at open, unless the open and high are same and the market starts coming down. Take the break of high of first five minute bar if you will. Same applies for entry for gap down
Logic: A gap in the correct direction only proves what the previous two candles have been saying.

12. Exit at Gaps: If the market opens beyond the SL, just exit. The setup position stands invalidated.

13. Hedging: Positional Trades always have the risk of a over night gap against position. I would really look at taking just OTM options as hedge only to protect losses, hence only if the market closes near my entry. If the market moves away from entry, hedging is an individual call to protect profits.

14. Intraday: Does this apply to intraday? Test it out. The volatility is higher on the shorter time frame. The entry set up would still be valid. But for exits, I would make partial exits at a certain points in profit and have a trailings Stops at chart pivots for the balance. This is because a thirty point gain can be wiped out by a single candle of opposite color. On an intraday a 30 point profit is priceless on most days.

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