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.
Indicators
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 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 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
Potential: 22.7R
Weekly
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.
Daily
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
Potential: 13.2R
Weekly
Notes: Huge risk reward potential here.
Daily
Notes: The pin bar at support would be a good place to get in.
June 16, 2003
Weekly
Risk: 373 pips
Possible Reward: 846 pips
Potential: 2.3R
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.
Daily
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
Weekly
Risk: 340 pips
Possible Reward: 2564 pips
Potential: 7.5R
Notes: Resistance becomes support. Really nice continuation pattern.
Daily
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
Weekly
Risk: 445 pips
Possible Reward: 750 pips
Potential: 1.7R
Notes: Fighting the trend a little on this one. It is a decent setup though.
Daily
Notes: Again, we see a double top with an Engulfing pattern, just before the drop.
October 11, 2004
Weekly
Risk: 269 pips
Possible Reward: 1177 pips
Potential: 4.4R
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.
Daily
Notes: We see a nice pin bar at the trend line. That would be ideal place to enter.
October 3, 2005
Weekly
Risk: 259 pips
Possible Reward: 0 pips
Potential: 0R
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.
Daily
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
Weekly
Risk: 383 pips
Possible Reward: 3917 pips
Potential: 10.2R
Notes: Huge potential return on this trade. There is also somewhat of a head and shoulders pattern at the bottom.
Daily
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
Weekly
Risk: 387 pips
Possible Reward: 125 pips
Potential: 0.32R
Notes: Not the best entry signal, but it is one that one might take. It is important to evaluate these marginal signals too.
Daily
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
Weekly
Risk: 238 pips
Possible Reward: 2229 pips
Potential: 9.4R
Notes: This one isn't as pretty as some of the others, but it could get the job done, if you took the trade.
Daily
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
Weekly
Risk: 286 pips
Possible Reward: 1597 pips
Potential: 5.6R
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.
Daily
Notes: No good confirming signals here. Not that there has to be, but it is nice to see.
January 14, 2008
Weekly
Risk: 346 pips
Possible Reward: 250 pips
Potential: 0.72R
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.
Daily
Notes: Nice bearish engulfing pattern at resistance.
December 29, 2008
Weekly
Risk: 422 pips
Possible Reward: 1506 pips
Potential: 3.6R
Notes: Big spike into support, turned resistance.
Daily
Notes: Nice double top formation with pin bars.
May 18, 2009
Weekly
Risk: 650 pips
Possible Reward: 1097 pips
Potential: 1.7R
Notes: Continuation pattern that may have been hard to enter. Price is heading into a resistance zone.
Daily
Notes: Nice bullish engulfing patter on the daily chart though. Perfect place to enter.
July 27, 2009
Weekly
Risk: 321 pips
Possible Reward: 830 pips
Potential: 2.6R
Notes: Another continuation pattern trade. Really tight setup, but it is a good one.
Daily
Notes: Not much of a signal on the daily chart.
August 17, 2009
Weekly
Risk: 334 pips
Possible Reward: 789 pips
Potential: 2.4R
Notes: Another nice engulfing pattern in congestion. Good continuation pattern.
Daily
Notes: Double bottom on support line, resistance became support.
March 15, 2010
Weekly
Risk: 321 pips
Possible Reward: 1632 pips
Potential: 5.1R
Notes: Another continuation setup, good profit potential.
Daily
Notes: No good confirming pattern on daily chart.
June 28, 2010
Weekly
Risk: 415 pips
Possible Reward: 2382 pips
Potential: 5.7R
Notes: Pretty good setup with deep punch into support level.
Daily
Notes: Strong break of the support line on the daily chart.
January 3, 2011
Weekly
Risk: 536 pips
Possible Reward: 15 pips
Potential: 0.03R
Notes: This would have been a losing trade, nothing wrong with that. Take the loss and move on.
Daily
Notes: Engulfing pattern in the opposite direction. Could be a sign that the trade won't work.
January 10, 2011
Weekly
Risk: 522 pips
Possible Reward: 1632 pips
Potential: 3.1R
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.
Daily
Notes: Nice engulfing pattern on daily chart.
August 29, 2011
Weekly
Risk: 432 pips
Possible Reward: 2102 pips
Potential: 4.9R
Notes: Pretty nice tip off before the price drop.
Daily
Notes: No good signs of confirmation on the daily chart.
April 30, 2012
Weekly
Risk: 326 pips
Possible Reward: 932 pips
Potential: 2.9R
Notes: Nice downward trend, third touch of the trendline.
Daily
Notes: Dojis with strong confirming candle at the trendline.
July 8, 2013
Weekly
Risk: 314 pips
Possible Reward: 936 pips
Potential: 3.0R
Notes: Strong confirmation of support level.
Daily
Notes: Even stronger confirmation on daily chart.
February 24, 2014
Weekly
Risk: 154 pips
Possible Reward: 211 pips
Potential: 1.3R
Notes: Small continuation pattern.
Daily
Notes: Nice rejection of support line.
May 5, 2014
Weekly
Risk: 216 pips
Possible Reward: 3304 pips
Potential: 15.3R
Notes: Small double top, like we have seen before. Very nice profit potential.
Daily
Notes: Strong rejection with pin bar formation.
September 15, 2014
Weekly
Risk: 182 pips
Possible Reward: 2362 pips
Potential: 13.0R
Notes: Continuation in trend. Nice gap after engulfing pattern.
Daily
Notes: Strong down candle on daily. Good confirming signal.
November 17, 2014
Weekly
Risk: 238 pips
Possible Reward: 1896 pips
Potential: 8.0R
Notes: Good signal in a trend.
Daily
Notes: Ranging pattern, followed by a strong drop.
December 15, 2014
Weekly
Risk: 363 pips
Possible Reward: 1737 pips
Potential: 4.8R
Notes: Another good opportunity to short into the trend. Could really make some money by stacking trades.
Daily
Notes: Strong rejection on daily chart too.
March 2, 2015
Weekly
Risk: 409 pips
Possible Reward: 352 pips
Potential: 0.86R
Notes: Probably too risky to take this trade so late in the trend.
Daily
Notes: No real strong confirming signals on daily.
Conclusion
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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