Forex Trading Basics Long Wick Candlesticks
http://forexbuffalo.com/showthread.php/306-Long-Wick-Candlesticks
I have written this short article as a follow up to the article I wrote on candlestick analysis, in this article I want to examine how effective a trading signal a long wick candlestick is on shorter time frames, and by shorter term frames I mean 1 day candles and 4 hour candles. In my previous article on candlestick analysis I examined weekly candlesticks. The theory of the significance of long wick candlesticks goes that a long wick candle signals that the market has become 'spooked' at an extreme price level and quickly retreated. A long wick on the bottom part of the candle is therefore said to be a bullish signal and a long wick on the top part of the candle is said to be a bearish signal. LongTailSignals.jpg LongWickCandlesticks.jpg Looking at the chart above it would appear, to the human eye at least, that long tail candles do indeed signal the markets future direction and market turning points with a degree of accuracy better than that of random chance. But the eyes can deceive because the human brain will often see patterns where none exist and twist what one does see to fit ones hopes and beliefs. As the saying goes: believe what you see, don't see what you believe. But how hard it is to actually see what is really there without reality being clouded by ones beliefs... But fortunately for us humans computers don't have this problem, computers don't invent patterns where none exist and nor do they twist what is there to fit their preconceived ideas. So in order to test the validity of long-tail candlesticks on daily and 4-hourly candlestick charts I am going to ask a computer what the results of me doing the following would actually be – Test #1: On the daily candlestick chart I will measure the effects of going long for the duration of the next candle if the bottom wick is at least 75 pips in length and the top wick is no more than 25 pips in length. And likewise, I will measure the effects of going short on the four hour candlestick chart for the duration of the next candle when the top wick is at least 75 pips in length and the bottom wick is no more than 25 pips in length. Test #2: On the four hour candlestick chart I will measure the effects of going long for the duration of the next candle if the bottom wick is at least 30 pips in length and the top wick is no more than 10 pips in length. And likewise, I will measure the effects of going short on the four hour candlestick chart for the duration of the next candle when the top wick is at least 30 pips in length and the bottom wick is no more than 10 pips in length. I will perform these tests on the EUR/USD and GBP/USD currency pairs. I have decided to pick the three years from the beginning of 2008 to the end of 2010 for these tests. If I find anything significant then I will run these tests again on data for the years preceding 2008, and then another set of tests on data for the start of 2011 to the present day. Candlestick Wick Analysis: The Results, After running the above tests the results are as follows - EUR/USD Daily: 3,026 pips won and 3,670 pips lost. Winnings to losses ratio 0.824 to 1. EUR/USD 4-Hour: 9,104 pips won and 9,410 pips lost. Winnings to losses ratio 0.967 to 1. GBP/USD Daily: 5,953 pips won and 5,318 pips lost. Winnings to losses ratio 1.119 to 1. GBP/USD Daily: 13,384 pips won and 13,387 pips lost. Winnings to losses ratio 0.999 to 1. I have very little to say about these results and they are far from conclusive, on the 4-hour candles there appears to be no 'edge' whatsoever, and on the daily candles there seems to be a slight edge on the GBP/USD and a negative edge on the EUR/USD. I will have to perform more tests on this, but right now all I can say about these results is that as a trading signal a simple long tail candlestick pattern on a daily or 4 hourly charts doesn't look particularly promising.......
