1. Financial Doctors Project Report
Amit Kumar Singh
B.Tech from IIIT Bhubaneswar
Electronics and Telecommunications Engineering
Phone number: 7205616013
Introduction:
As a part of undertaking experimentation I decided to dedicate my first first part to failed
experiments and from then onwards I incorporated one idea after another to devise a model
which incorporates Fibonacci retracing , 3 candlesticks and RSI index to take my trades.
I have devised two conditions for candlesticks which must be followed in sync with the two
remaining tools so as to provide maximum profits when I indulge in pyramid trading. This idea
works best in correction phase of the market. Simply respecting the flow of nature and observing
certain downturns helped me establish this model. I found the accuracy of my three candlestick
pattern was close to 80 percent. I hope to work over it in the meantime and incorporate tools to
provide me with better results. I would like to call this technique as "the candlestick trinity"
2. Experiments giving no substantial outcome
The objective of this report is to do certain experiments and then validate them against certain set
of charts. To begin with I will try and use exponential moving average (EMA) rather than SMA
to take my trades in conjunction with R and S points. To find support and resistance levels the
SMA indicator will be helpful.
In my strategy I started with drawing R and S lines to start with and then I incorporated two
exponential moving averages one with a time frame of 233 periods(for long term trend) and
other with a time frame of 55 periods. These numbers were chosen because they are a part of
Fibonacci series and as per law of nature I am experimenting with these numbers to get to a good
buying and selling strategy.
3. The above chart is that of AUD/JPY analyzed in one week time frame. The R point according to
historical tracing lies at somewhere near 66.270, so ideally this is the place for me to book
profits.
4. The AUD/JPY when analyzed in 8 hour time frame showed a different EMA trend where the
sentiment of the market looked bearish. It must be noted that this result obtained is in complete
contrast with that of the result obtained with one week time frame shown earlier. I also tried to
incorporate the RMI index with the charts as a lagging tool to give me an indication whether the
trend aligns with overbought or oversold but its values lie in between 70 and 30 thus giving me
no concrete indication for my trading position.
5. In final leg of my analysis I took a three hour time frame. The results, as expected, were in sync
with my observation in 8 hour time frame but still not conclusive enough for me to take a stand
therefore i need to explore other techniques to get into business. Therefore among the known
tools I decided to experiment alongside the DMI and ADX to get a measure of volatility or
anything else which can provide me with an insight.
The value of ADX is somewhat near 38 which is closer to a no trend indicator again this does not
provide with anything conclusive. At current position in short term it has made a downward
trending candlestick along with some doji patterns in the end, but it is nowhere near my R or S
line so I choose to stay out of the trade.
6. Since the above points lead me to a deadlock I will be experimenting with he fibonacci
retracement tools in the next subsection.
PROPOSED THEORY
At this point of time I have a major point at about 1.33 zone (R and S) and we can see that the
market has just broken the 76.4 percent barrier (please refer to the chart below) which was a
crucial point from Fibonacci retracement perspective. My observation is that if market has
broken out on the upper side above this barrier of 76.4 (or any other major retracement
point points like 50% or 61.8%) and it has a subsequent candlestick (let's call this
candlestick as bar1) which has a body whose high is not higher than that of the large
breakout bar just before it (Condition 1) "AND "
the bar next to bar1 again (let's call it candlestick bar 2) has a low that is below the second
bar(Condition 2), the chances are very high that the breakout will not happen and the market
will change its course away from the uptrend in opposite direction.
Mind you this technique is valid "only" in case of a potential breakout. Therefore use of
other indicators like RSI will help increase accuracy of the model.
7.
8. TRADING STRATEGY
In the above case my trading strategy will be to enter and sell EUR/USD at the close of bar 2.
My limit will be up to the next closest major reversal R or S point or the next closest
Fibonacci point (which in this case is 61.8%) whichever arrives earlier, and then sell half of my
quantity to ensure profit booking. I will continue with the remaining shares if I believe that the
market will go further downwards and the current market behavior is a case of market correction.
In short it will apply the principal of pyramid trading. The methodology to fix the limit of my
setup is fixed and I strictly adhered to the above principle during my trading.
From stop loss perspective I will put my stop loss in a way that risk to reward ratio is minimum
1:5 . Ideally the upper part of the body of Bar1 should have been my point of stop loss but I
have seen that due to momentum the market reverses and falls down but it takes time to do so.
Therefore it's a better idea to fix the stop loss as per risk reward ratio than to regret about a
missed opportunity.
To reiterate I will observe the candlestick patterns in bigger time frames above twelve hours
following the Fibonacci series timeline besides analyzing time frames of 3 hour, 5 hour and 8
hour. I am taking the trade based on 8 hour timeline.
Since I am taking this trade confidently believing that there will be a fall in price of this share. In
later part of my results in some time I will show the result of this trade, so for simplicity let's call
this trade as TRADE1.
Before trading however I will follow the basics of not trading in between trends, I will wait for
the trade to reach nearby my R and S line and then decide to buy or sell accordingly. The
strategy which I have mentioned is for the purpose of trading in such a way that our losses due to
corrections in market can be minimized, it should not be viewed independently to make profits.
If I have analyzed that market will go from 10 to 100 then after reaching some landmark points
(like 100 where profits may be booked) this technique can be used to complement pyramid
trading and making profits.
9. SUBSTANTIATION
The above figure shows a region 1 in which the pattern for reversal was not followed and as a
result the market went up. Thus it exemplifies a particular setup where the proposed candlestick
10. pattern was not followed and the market bursted up in the trending direction. The figure is shown
to bring home a point that a pattern which bursts the wall to continue the trend instead of
reversing will not have the symptoms which I have entailed in my proposed theory. The chart
shown above is examined in the time frame of 8 hours which is similar to my proposed time
frame.
11. The above chart is taken from FRA40 in 8 hour time frame. It follows both condition 1 and
condition 2 thus leading to a breakout reversal as per the claim. The region of interest is
encircled and highlighted by ellipse.
Again in the same index, same time frame , we satisfy condition 1 and 2 and we see a reversal of
trend as shown above.
12.
13. The above figure also shows that a pattern which matches the requirement reverses it's
trend, this time however we see that in one of the cases it reversed near the R line and in other
case highlighted as "breakout halted" the uptrend halted on having the required pattern.
14. There is a beautiful pattern formation in the same chart which I labeled "pattern on uptrend".
Here I see that the candlestick is near my R point and more importantly it followed my condition
1 and condition 2. Unsurprisingly the trend did reverse. Let's just assume that we took the trade
on R point(by selling) and then booked profits according to Fibonacci pattern near red line and
green line . The mentioned candlestick pattern in conjunction with the Fibonacci pattern will
give us lot's of profit if we followed pyramid trading in the above case.
Again to look into the trade as a whole I observe that at 50 percent point there is the formation of
set of doji candles in a row (which is mentioned as pattern 4), for me its again an indicator of
reversal, so here I will enter market by buying , in fact I would have been right to do so. What
happened next is that the upward trend reversed when the condition 1 and condition 2 which I
mentioned was followed, up to then it was in upward swing . This trend downwards continued
again up to 23.6 percent mark where the market reversed again. This technique comes handy.
16. The two hour time frame also gives the same sign of reversal as that in above chart.
17. Let me state upfront I am randomly taking these charts on end of uptrend's and downtrend's, ie.
the end of leg, which is a susceptible condition for the formation of Fibonacci retracing and
expansion lines. Every instance of my sample space is a big success and has proven my strategy
right by far. This success continues also in the next chart. Let me show how.
Chart of AUD/USD in an 8 hour time frame
18. In the above chart I have used an ellipse and a rectangle, the part inside the rectangle shows that
condition 1 and condition 2 are satisfied. Again the uptrend reversed. The thing we have to be
careful about is that after going below the 72.5 percent mark the trend again went upwards. So
the fact remains that at least in short term the pattern still holds good but we have to be careful in
the important Fibonacci terms like 72.5 percent because as in above case the trend can re-
reverse.
CHART IN A 1 DAY TIME FRAME
19. In the above case the market changed its course and went ferociously downwards, no doubt
selling at the point of my candlestick pattern detection (with the help of my proposed theory) that
the market will reverse its trend, we can make huge profits in a long term trade.
AUD/USD in a 4 hour time frame
20. In a 4 hour time frame the candlestick pattern in my selected zone is not conclusive, insted the
market appears to be flat in that zone, my candlestick pattern with condition 1 and 2 is not
formed in my area of interest, it appears as if it does not provide this confirmation in smaller
time frame. Maybe I should try the trades with bigger values.
The above is the chart in 6 hour time frame
21. AFTER THE SESSION
After attending the morning session today I think I got an idea so I will try this idea right now.
Here's the thing , I am using Fibonacci tracing pattern in conjunction with an observed
candlestick pattern to get my desired result by predicting reversals. What if I use an additional
tool of RSI indicator to predict reversals. I think it may provide me with some better insight as to
when should I enter the trade. Let's give it a try.
EUR/USD 8 hour time frame which I referred to as trade 1
22. I will confess its simple, I will sell here. The inclusion of RSI indicator will very much help me
to take a decisive step. My candlestick pattern and RSI will be a potent weapon for me to take a
great trade lets try and experiment more.
Even in a 2 hour time frame we are getting a selling signal.
23. Let's try a different chart and follow the same process
This is the best example of my trade, a beautiful pattern of three candlesticks showing
reversal signal at important 23.6 percent mark
24. The above example of a reversal sums up as a powerful support to my three candlestick theory.
The RSI indicator also is in support of my observation and is complementing my theory
beautifully. The encircled part in the figure again shows my three candlesticks indicating a
reversal and this reversal changes only at a crucial point of 23.6 percent in my Fibonacci
retracement chart, my trading strategy will ensure good profits in this trade.
The EUR/GBP in a two hour time frame
25. EUR/GBP in 12 hour chart
The above chart vindicates my stand in a long term but the big problem here is that by the time
my candlestick trend is confirmed the prices already move beyond my reach of purchase. It
26. appears as if I need to only look at it from analysis purpose. From trading perspective the 8 hour
mark looks to me as the best timeframe. The fact that it's a part of Fibonacci series adds to my
belief that this time frame is proper.
The candlestick trinity in NZD/USD 8 hour chart
Again the same reversal trend is followed and reversals are shown only at the retracement points.
28. The three highlighted ellipses in the figure above shows the candlestick trinity pattern in three
areas and in each of the areas the market sentiment has reversed. Again the Fibonacci
retracement is as insightful as ever, giving me good margin to enter the trade at the right
moment. Thus if we take the trade in bigger time frames we can make good profits with this
technique .
`
XAG/USD chart in 8 hour time frame
29. I have confirmed that "the candlestick trinity" works very well on uptrend reversals. So I tried a
complementary theory . Let me confess this is not my observation it was rather an intuition like,
if X happens the complement of X should happen, law of nature as we say it. The first chart I
took was a success. So let me state my laws upfront now:
Condition 1: If on a downtrend near an R and S line or a major percentage in Fibonacci we
have a candle on the downside (red candle indicating loss) and the subsequent candlestick
(lets call it bar 1) has a low point not lower than previous bar "AND"
Condition 2: The bar next to bar 1( call it bar 2) has a high that is higher than the bar 1
then the market can go and reverse upwards.
Mind you this technique is valid "only" in case of a potential breakout. Therefore use of
other indicators like RSI will help increase accuracy of the model.
Trading strategy
In the above case my trading strategy will be to enter and sell XAG/USD at the close of bar 2.
My limit will be up to the next closest major reversal R or S point or the next closest
Fibonacci point whichever arrives earlier, and then buy. I will continue to apply the principal of
pyramid trading. The methodology to fix the limit of my setup is fixed and I strictly adhered
to the above principle during my trading.
From stop loss perspective I will put my stop loss in a way that risk to reward ratio is minimum 1:5 .
Ideally the lower part of the body of Bar1 should have been my point of stop loss but I have seen that
due to momentum the market reverses and falls down but it takes time to do so.
31. In two hours time frame the candlesticks make a small doji candles but important everything is
that it follows condition 1 and 2 so it changes course as expected..Since the rally on both
downside and upside was not big in either direction I don't expect to find such patterns in a one
day time frame.
32. The above chart is in 8 hour time frame and that of FRA 40. The "complementary candlestick
trinity" pattern is followed by a reversal. The RSI value around reversal was around 50. I am
familiar with the techniques of hidden divergence and I can vouch for the fact that there was no
complementary higher low and lower low combination to make life easy for me. So in this case
the need of other lagging tool can help but I will still go ahead and take the trade because it
followed Fibonacci pattern and my trinity technique.
33. The above chart includes RSI indicator along with the chart in twelve hour time frame . It does
not give me significant input however.
FRA 40 in 3 hour time frame
35. At the point of interest the value of ADX was nearby 60 (58.9) thus giving me indication in
lower time frame that it might be having an exhaustion phase and that the trend might reverse.
US 30 in 8 hour time frame
36. In the above 8 hour chart we I have noted that the "complementary candlestick trinity" was
formed in three places and in each of the places the trend reversed, therefore I claim that this
theory of my three candlestick is validated. The ADX here gives me no clue.
AUD/JPY in 8 hour time frame showing proper Fibonacci reversal
38. Also note that the trinity indicated by rectangle is supported by RSI which is at 20.
Complementary trinity in USD/CHF 8 hour time frame
39. In above case RSI was less than 20 and ADX 53.8, RSI was somewhat indicating oversold and it
was in sync with my analysis so I would buy.
GBP/JPY in 8 hour time frame
40. The above trade is a ripper, I will buy it with my eyes closed and I will ace the trade. RSI at 18
and ADX at 66 gives me a green flag to trade in cohesion wih my trinity.
41. CONCLUSION
The candlestick trinity as a whole is a good combination which held true in almost all the cases,
but the best results were shown in 8 hour time frame . I genuinely could not find patterns
where condition 1 and condition 2 were followed near the R and S line or the Fibonacci
retracement points , and the market did not reverse the trend. This is a good indication from my
experiments perspective. The biggest drawback of this technique however is that I could not
determine the ideal stop loss under my trading rules even though I was following the
pyramidal trading pattern. Also I could not use lagging tools to the best of their potential. I
found no chart where trinity was not leading to trend reversal but this is solely based on
my personal chart sample space and observation As of now the documentation of my core
ideas are done. This however by no means indicate that I am done. There is a lot of potential in
the RSI indicator to work in sync with my model and give me better results. If I can find the
nature of divergence at that point the task for me may get easier. To make this model perfect will
take some time by I believe that it's a good starting point. There is not a single mismatch in my
trade so far at no time has Fibonacci, and RSI have given me mixed signals. If I am a trader I
will confidently take my trade based on trinity . In fact I have taken trade based on my trinity and
made profits in 2 out of two times. The technique is promising but I also believe that RSI has
much more potential than I know now. Maybe the session on 10th will give me my clues. This is
all I have for now and I thereby submit my observation to "The Financial Doctors" with a
promise to make this a bigger better and stronger model over some time.
