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In this description and the whole strategy I count candles backwards and current candle (not closed) is always candle number 0, the previous is 1, etc. That seems to be the most logical way, especially from the point of view of the programmer. Please imagine that we add to "engulfing pattern" one more candle at the end, which will be our candle number 0 and which confirms last one from enguling pattern. So, both two last candles (current 0 and previous 1) must be in one direction and last candle (0) must exceed maximal or minimal value of wick (shadow) of previous candle (1). Of course, maximal value when new trend is UPward, minimal if is DOWNward. Another difference in this pattern (compared to engulfing pattern) is that the engulfing candle (1) don't have to be bigger than the previous candle (2), because it is sufficient that both last candles (1 and 0) engulf candle 2. And almost last principle to this pattern, if between candle number 1 and candle number 2 there is a really small candle (also doji, pin-bar and every other used names) - we must ignore it mark it as "x"). It would be best to explain with an example. Let's consider this for the case of a new uptrend (after changing from downtrend). Of course, the first candle in the pattern must be downward (candle number 2) and another - upward (candle number 1). The value of the current candle (0) must be above the highest value of the previous candle (1) and ALSO above highest value of candle 2. If it is still difficult to understand I'll show you on the screenshots:
As you can see value of candle 0 was above highest value of candle 1 and candle 2. It was enough to trigger the order. I marked this value with the horizontal line.
I tested different configurations of this pattern. I have compared different schemes and relationships between the candles, between their close, open, high and low values and positions and the relationships of these positions compared to each other. As a result, I recieved the one pattern about which I write you as the most effective of all the others (with good filtering I get with this pattern, for example for EURUSD on timeframe M5, over 95% profitable trades during over 15 years).
OK, so pattern is only one thing among many others. One of them is appropriate filtering patterns in order to avoid false patterns. I think I'll start from demand and support zones. I don't want to bore you with too much theory from the very beginning, so let's say that we won't use the term of "supply and demand zone". We will use "room to the left" instead. A few years ago I found very interesting video in part similar to my theory and strategy. I encourage you to see it. There is also the concept of "room to the left" or "space to the left". Here is the link: https://www.youtube.com/watch?v=t-pD3fap25c
"Room to the left" in my strategy is counted from highest high or lowest low (whether we are after change in the trend from upward to downward or from downward to upward) of specified number of candles counted from current candle and that number is different for each currency pair. The minimum distance from the extreme (bottom of our candle "x" on screenshot) to the last such value in the past is very important and also depends on the characteristics of a given currency pair. From my research, the absolute minimum is 25 candles - if you want to open many short-term transactions with small profit (it's also good for automated trading).
Next parameter which filters out bad patterns in my strategy is "Highest_Candle_From_3" and it defines if the sum of the real bodies of current (0) and previous (1) candle is higher than real body of 3rd candle. This setting is required only for certain currency pairs. As well as another parameter in strategy "Third_Candle_smaller" which filters out when real body of candle number 4 is smaller than the sum of the real bodies of current (0) and previous (1) candle. Name of parameter is misleading, so I will change later name of parameter to "Fourth_Candle_smaller", sorry for the wrong nomenclature, but as I said it's development version. Anyway, this parameter as previous one is also required only for some currency pairs and we will talk about it later. It's not 100% necessary, but I wanted to say about it while we are on the topic of pattern.
I added to the system 4 another parameters with which we can set the minimal and maximal sizes of the candles with number 2 and 3. Especially minimal size is very important, because for many currency pairs if real body of candle number 2 or 3 is small - pattern just doesn't work. For all who would like to test the strategy manually I recommend to ignore such small candles or just wait for a new opportunity with next pattern, especially when there are two consecutive small candles.
At the end of the today's part of description I will show you two screenshots which contain the list of all editable parameters which I will explain further in next post.
I'll show you today one more thing. This is how looks the result of the optimized strategy. Currency pair is EURUSD, timeframe M5, period = over 5 years.
Price Action EA v.2.4