An Expert Of A System by Sylvain Vervoort
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
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