Quote from billp:
NihabaAshi,
I'm somewhat familiar with candlestick patterns(although have forgotten a lot of their names already) but a bit confused with your statements on volatility bars. If you would be so kind to clear my confusion as below. Thanks.
1) You mentioned with regards to CM69's 2nd chart:
".....Do you see the dark (red) line as an expansion interval after your highlighted box?
That's a volatility spike, that tells you to keep alert for a pattern signal that may form because you now have part of the puzzle..."
When you say the dark red line, you are basically saying the wide range bearish bar with a slight bottom tail right?
Hi billp,
First, there's a huge difference between Japanese Candlestick analysis and Volatility analysis.
I use candlestick analysis as a confirmation tool only and I don't recommend it to be used as a stand alone strategy all by itself (nothing else)...
Regardless if the discussion is about
lines or
patterns.
To answer your first question, on CM69's chart his intervals are color coded with green or red.
Red Line = Dark Line in my terminology.
Green Line = White Line in my terminology
You can use any colors you want as long as they are not the same.
Therefore, yes to your first question assuming we are talking about the same chart.
2) Understand that you have mentioned about volatility bars here and elsewhere, basically are you saying that large volatility bars are those bars that have large spreads (ie difference between high and close) regardless of where the open and close are?
No...my reference involves the price action between the Open and Close and not the price action between the High and Low.
WRB = Wide Range Body (not bar) and its the price action between the Open and Close.
Expansion Interval = WRB in my terminology.
To qualify as a WRB as explained in the Trading Hammers (revisited) thread simply means that the Body > each of the prior three bodies (see reference thread for more info).
http://www.elitetrader.com/vb/showthread.php?s=&threadid=52880
Now, just because we have a WRB doesn't imply its a volatility spike.
The volatility spike qualification is determine by the range (bodies) of the prior intervals and those prior bodies must be small bodies in comparison to the most recent WRB before them.
I do different types of volatility analysis and this is just one particular type.
In addition, if your into Times & Sales, you should also be seeing small size trades in those small bodies in comparison to more large size trades (we are not talking about Ask and Bid) in the WRB.
Further, the speed of the trades printing in your Times & Sales window should be increasing in the WRB in comparison to what you had saw in the prior small bodies.
If you see the above...that's a WRB with Volatility Spike.
Like I said, Times & Sales is not needed if your experienced enough with volatility analysis but can be very helpful for those just learning volatility analysis.
3) Are you also stating that if there is a wide ranging bar (not exactly the correct term, just trying to say that a bar with a large high-low difference) , then if its followed by smaller bars (ie contraction in volatility), this might give us a clue that the direction may reverse?
No...I'm not saying that.
I'm saying it gives you a clue that a pattern signal will soon appear.
It can be trend continuation signal or trend reversal signal.
Once again, a WRB (expansion interval) is in reference to the body of the interval which is the price action between Open and Close being mearsured against the price action between the Open and Close or the prior three most recent intervals.
Is it correct that in 1 of the example explained previously by you, if there happens to be a large bearish bar followed the next day by a smaller bullish bar near support area, we are looking to buy?
You should have notice when I'm talking about price contraction...
I'm using words like bodies and/or intervals.
It's plural.
Thus, one interval of price contraction after a WRB does not qualify as declining volatility for trade decision purposes.
It should only be telling you to continue monitoring the price action for the next several intervals to see if price continues or remains contracted.
Simply, you seem to be concerned with looking for reversal signals while I'm concerned with understanding the prior price action because it
could setup a trade signal that's around the corner...
Trend Continuation or Trend Reversal.
I tend to be more focused on the support/resistance zone (together with maybe smaller bars after the wide bearish bar --not that particular whether the small bars are bearish/bullish).
I'm not so concerned with whether the next day/days have a small bullish candle after a wide ranging bearish candle so that I can enter the day after the bullish bar. Am I wrong not to consider that?
Lets put it this way.
If your profitable, keep doing whatever you are doing.
With that said, if your using Japanese Candlestick patterns as part of your trade methodology...
You should be concern with volatility analysis.
Thus, the only thing I know about your trade methodology is that you said you tend to focus on s/r levels.
There are hundres of ways to determine s/r levels involving math, trendlines, volatility, key market events, WRB's, candlestick patterns or shadows et cetera.
Whatever your using as s/r levels...if its working (as in being profitable) keep using it.
However, if it is not working and you want to keep s/r levels as a key part of your trade methodology...
You obviously should explore using a different type of s/r analysis in comparison to what your currently using.
By the way, my s/r analysis is a key part of my exit strategy and not a key part of my entry strategy.
Also, I don't trade stocks nor do I monitor them...
I'm a futures trader.
Last of all, everything we are talking about can be performed (the same type of analysis) with Bar Charts and is not exclusive to Candlestick Charts.
Mark
(.a.k.a.
NihabaAshi) Japanese Candlestick term
