Alright, I've been talking about this for a couple of weeks and here it is!
This is the first in a series of studies that I'm going to be doing on building trading systems. It is a little different than what you are used to on other sites.
Keep in mind that regardless of what we find in these studies, the following always applies:
- You are 100% responsible for your own trading, win or lose
- These studies are not suggesting that you trade Forex with real money
- Past performance does not guarantee future results
- Even if two traders trade the exact same system, their results will always be different
- This is not an actual trading method, only a study
If you want to find out how I created these studies, read my post on historical Forex data and intro to trading systems development.
In This Study
To kick things off, I'm going to dig into the Engulfing Candle pattern on the EURUSD weekly chart. First, I will show you how to find all of the Engulfing Candles on the weekly timeframe.
This will help identify possible opportunities, as well as false positives. Then I will graphically identify all the times when the pattern happens at support and resistance levels.
At this point, we will NOT be formulating an actual trading plan. We simply want to observe the opportunities without any biases.
In later posts I'll show you possible trading methods that can come out of this research. But for now, keep your mind open and don't try to trade this because it is not an actual trading method.
We are just getting started.
If you want to test this yourself, we have two indicators available:
- Metatrader 4 Alerts Indicator – When you install this indicator in Metatrader 4, it will send you an alert via your choice of audio, screen, text, email or push notification.
- Forex Tester 2 Indicator – Marks all engulfing candles on the current chart. Makes it much easier to spot them during backtesting.
The Trading System Development Process
This may seem kind of boring right now, so let me give you a roadmap of where we are going with this.
- Study – First we will do a study of the pattern to get a rough idea of the potential of the pattern. That is what this post will show you.
- Formulate – If our results look good in this study, we will create a very basic trading plan that could possibly be profitable.
- Backtest – Then we will backtest the strategy several times to find out the potential that our newly formulated strategy has. If it doesn't work in backtesting, then we have to go back to the Formulate stage.
- Demo – Should several rounds of forward testing in a demo account. Don't risk any real money at this point.
- Trade It – Finally, you need to make the decision as to if you want to trade the method with real money or not. Only you can make that choice.
All Weekly EURUSD Historical Engulfing Patterns
Here is a spreadsheet with all of the weekly Engulfing Patterns from 2001 until last month.
Click here to download it and follow along at home.
It is an Excel file and the highlighted lines are the engulfing candles. The lines with a “1” at the end are the candles that I will be examining below.
I used Forex Tester 2 to screenshot all the charts. All measurements are not exact, but are close enough for study purposes. During actual testing I will be more exact.
Alright are you ready? Let's get started…
May 13, 2002
Risk: 165 pips
Possible Reward: 3750 pips
Notes: A lot of potential in this one. There is a possibility that you may have exited early on the first major retracement. Either way, this trade has a lot of potential.
Notes: There is also an engulfing pattern on the daily chart. This should be a confirmation signal to get into the trade.
December 2, 2002
Risk: 271 pips
Possible Reward: 3567 pips
Notes: Huge risk reward potential here.
Notes: The pin bar at support would be a good place to get in.
June 16, 2003
Risk: 373 pips
Possible Reward: 846 pips
Notes: This isn't really a great signal because there is not a clear resistance level. But I would thought that I would throw it in because it is a trade that one might take. It is a bad trade because it is against the trend and there is not much separation between the peaks.
Notes: The trade looks much better on the daily chart, but it probably wasn't a good trade to take. As we have noticed with the other charts, there is also an idea engulfing pattern on this chart too.
September 1, 2003
Risk: 340 pips
Possible Reward: 2564 pips
Notes: Resistance becomes support. Really nice continuation pattern.
Notes: Not a real strong signal on the daily chart. I supposed you could have used the double bottom as a signal to enter the trade. The only issue with this is the second low is lower than the first.
February 16, 2004
Risk: 445 pips
Possible Reward: 750 pips
Notes: Fighting the trend a little on this one. It is a decent setup though.
Notes: Again, we see a double top with an Engulfing pattern, just before the drop.
October 11, 2004
Risk: 269 pips
Possible Reward: 1177 pips
Notes: This one might have been tough to enter because it is not that obvious. The pin bar before it is a good sign that price might be moving up soon.
Notes: We see a nice pin bar at the trend line. That would be ideal place to enter.
October 3, 2005
Risk: 259 pips
Possible Reward: 0 pips
Notes: The first loser so far. It is a decent potential double bottom on the weekly chart. If we entered with a buy stop above the Engulfing candle, it would have kept us out of this trade.
Notes: We don't see any of the patterns that we saw in the previous setups. There are no pin bars or engulfing bars at the support level.
February 27, 2006
Risk: 383 pips
Possible Reward: 3917 pips
Notes: Huge potential return on this trade. There is also somewhat of a head and shoulders pattern at the bottom.
Notes: No good signal on the daily chart. Funny thing is that it looks almost exactly the same as the chart from October 3, 2005.
June 5, 2006
Risk: 387 pips
Possible Reward: 125 pips
Notes: Not the best entry signal, but it is one that one might take. It is important to evaluate these marginal signals too.
Notes: Nice pin bar Engulfing candle on the daily chart. There would have been a good R multiple if the trade was taken on this timeframe.
September 3, 2007
Risk: 238 pips
Possible Reward: 2229 pips
Notes: This one isn't as pretty as some of the others, but it could get the job done, if you took the trade.
Notes: There is a pin bar here that could have been a good secondary indication to get into the trade. Trend continuation play here.
October 22, 2007
Risk: 286 pips
Possible Reward: 1597 pips
Notes: This is a trend continuation play. Not sure if it would be a good place to get in, but it would have been very profitable.
Notes: No good confirming signals here. Not that there has to be, but it is nice to see.
January 14, 2008
Risk: 346 pips
Possible Reward: 250 pips
Notes: This is similar to a couple of the tops that we have seen before, but it did not work out as well. There was some room to profit here however. It just depends on how the trade is setup.
Notes: Nice bearish engulfing pattern at resistance.
December 29, 2008
Risk: 422 pips
Possible Reward: 1506 pips
Notes: Big spike into support, turned resistance.
Notes: Nice double top formation with pin bars.
May 18, 2009
Risk: 650 pips
Possible Reward: 1097 pips
Notes: Continuation pattern that may have been hard to enter. Price is heading into a resistance zone.
Notes: Nice bullish engulfing patter on the daily chart though. Perfect place to enter.
July 27, 2009
Risk: 321 pips
Possible Reward: 830 pips
Notes: Another continuation pattern trade. Really tight setup, but it is a good one.
Notes: Not much of a signal on the daily chart.
August 17, 2009
Risk: 334 pips
Possible Reward: 789 pips
Notes: Another nice engulfing pattern in congestion. Good continuation pattern.
Notes: Double bottom on support line, resistance became support.
March 15, 2010
Risk: 321 pips
Possible Reward: 1632 pips
Notes: Another continuation setup, good profit potential.
Notes: No good confirming pattern on daily chart.
June 28, 2010
Risk: 415 pips
Possible Reward: 2382 pips
Notes: Pretty good setup with deep punch into support level.
Notes: Strong break of the support line on the daily chart.
January 3, 2011
Risk: 536 pips
Possible Reward: 15 pips
Notes: This would have been a losing trade, nothing wrong with that. Take the loss and move on.
Notes: Engulfing pattern in the opposite direction. Could be a sign that the trade won't work.
January 10, 2011
Risk: 522 pips
Possible Reward: 1632 pips
Notes: Internal support line, this would be a trade that might easily be missed. Might also be hard to take a trade in the opposite direction after previous loss.
Notes: Nice engulfing pattern on daily chart.
August 29, 2011
Risk: 432 pips
Possible Reward: 2102 pips
Notes: Pretty nice tip off before the price drop.
Notes: No good signs of confirmation on the daily chart.
April 30, 2012
Risk: 326 pips
Possible Reward: 932 pips
Notes: Nice downward trend, third touch of the trendline.
Notes: Dojis with strong confirming candle at the trendline.
July 8, 2013
Risk: 314 pips
Possible Reward: 936 pips
Notes: Strong confirmation of support level.
Notes: Even stronger confirmation on daily chart.
February 24, 2014
Risk: 154 pips
Possible Reward: 211 pips
Notes: Small continuation pattern.
Notes: Nice rejection of support line.
May 5, 2014
Risk: 216 pips
Possible Reward: 3304 pips
Notes: Small double top, like we have seen before. Very nice profit potential.
Notes: Strong rejection with pin bar formation.
September 15, 2014
Risk: 182 pips
Possible Reward: 2362 pips
Notes: Continuation in trend. Nice gap after engulfing pattern.
Notes: Strong down candle on daily. Good confirming signal.
November 17, 2014
Risk: 238 pips
Possible Reward: 1896 pips
Notes: Good signal in a trend.
Notes: Ranging pattern, followed by a strong drop.
December 15, 2014
Risk: 363 pips
Possible Reward: 1737 pips
Notes: Another good opportunity to short into the trend. Could really make some money by stacking trades.
Notes: Strong rejection on daily chart too.
March 2, 2015
Risk: 409 pips
Possible Reward: 352 pips
Notes: Probably too risky to take this trade so late in the trend.
Notes: No real strong confirming signals on daily.
Again, the goal of this study is simply to examine this pattern on the weekly chart for the EURUSD. In a future post, I will examine potential trading methods, based on this study.
After looking at these results, what kind of trading system do you propose?
Is there anything that I missed? Did I have too much positive or negative bias?
If you would like to help with these studies, please contact me.
Leave a comment below…
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