Stocks & Commodities V. 31:10 (20-25): An Expert Of A System by Sylvain Vervoort

Stocks & Commodities V. 31:10 (20-25): An Expert Of A System by Sylvain Vervoort
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An Expert Of A System by Sylvain Vervoort

Colorized Candles

In this sixth part of a seven-part series, we look at an expert trading system that color-codes candlesticks to simplify entry & exit decisions.

When in doubt, follow the expert — except that this expert is a trading system that will make your buy & sell decisions easier. Keep in mind there is no perfect expert that will make profitable trades all the time. Your best chance for a profit at the end of the day is to stay in a profitable trade for as long as possible and avoid entering losing trades. Together with good risk & money management, the odds will be in your favor.

An expert system that color-codes your candlestick chart will give you the best possible indication of when to buy and when to sell. In the standard candle chart in Figure 1, a green candle body indicates that the day closed with a price higher

than the opening price; a red candle body means the closing price was below the opening price. On this chart, it’s not so easy to see where to take action.

Now look at Figure 2. It’s the same chart but color-coded by an expert color-coding system. With this chart, if you buy when the candle color changes to green and sell or go short when it changes to black, it’s fairly clear where you will buy and sell.

Besides having clearer indications for long or short positions, you also have the advantage of the candlestick chart format itself. In Figure 2, a white or unfilled candle body means the day closed with a closing price above the opening price. A filled body, either green or black, means the day closed below the opening price of the day. Figure 2 shows a nice, profitable example, but it will not always be that way!

Creating the expert

First, you need a rule that tells you when to go long and when to go short. This could be an extremely complicated setup with several rules, or it could be a simple approach such as a trend-following system using moving averages and a crossover between two averages.

A crossover rule will work well as long as prices are trending. Unfortunately, as we know all too well, this is often not the case. The moving averages will cross and result in losses. Hence, it becomes necessary to apply techniques to avoid these unprofitable crosses as much as possible. And even then, with every signal you will have to decide whether to take the trade based on other technical analysis techniques.

To limit the volatility of the price change, I will not use closing prices to create the expert indicator (“SVEHaTypCross”). I will use a smoothed version of closing prices based on heikin-ashi calculations on one side, and on the other side I will use the typical closing price that is calculated by adding the high, low, and closing price and dividing the sum by three.

The first step is to create two new datasets, one with the recalculated heikin-ashi closing price (haC) and the other with the typical closing price (typical):

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