Candlestick Trading: A Momentum Strategy with Example

• As a trading method, candlestick analysis involves keeping track of the price action throughout the previous “n” candlesticks before making your next move. Therefore, if the price has been going up steadily for several candlesticks (let’s say three), then additional gains are likely.
• Candlestick charts represent the open, high, low, and closing prices of securities, derivatives, or currencies over a certain period.
• Here, in this blog post, we’ll learn everything there is to know about using candlestick charts as a momentum trading strategy.

What is the momentum strategy?

• Momentum strategy refers to the expectation that a security’s price will trend in a specific direction. For any given asset, price momentum is trending up or down.
• For instance, on February 14, 2020, when Tesla started delivering vehicles in China, the closing price of Tesla continued to rise until February 19, 2020.
• Negative momentum, on the other hand, is possible. Oil prices during the COVID-19 epidemic continued to decline as the oil conflict between Russia and OPEC escalated.

Why does the momentum strategy exist?

• The goal of the momentum strategy is to make money off of currently popular stocks with substantial trading volumes. This strategy aims to make a profit by buying high and selling higher. Please take advantage of a stock’s upward or downward momentum by buying it and holding it until it shows signs of reversing.
• Depending on how quickly a financial asset changes direction, momentum traders may hold their positions for seconds, minutes, hours, months, or even years.
• When compared to other trading methods, momentum trading is hazardous. Trading at the wrong times may result in heavy losses, so getting the timing right is crucial. Stop losses, portfolio diversification, and other risk management forms are standard tools momentum traders use to cut down on losses.

Example of candlestick trading – momentum strategy in Excel

• Let’s have a look at an actual Excel candlestick trading example now. Practical applications of the Excel model are:
• Experimenting with a momentum method and learning how it works
• Knowing how to put a trading plan into action
• Trading-parameter optimization
• To better comprehend the momentum trading intraday returns
• Here, we’ll use information from the Binance exchange’s BTCUSDT pair as an example. This asset is a candidate for the momentum investment approach. For the BTCUSDT, we employ a time frame of 5-minute candlesticks. The numbers cover dates from December 12, 2021, to December 22, 2021.
• We want to maximize our profit from this market momentum by setting stop-loss and take-profit levels. Based on the trader’s comfort level with risk, several alternative stop-loss levels may be implemented using this technique.

Assumptions

1. For the sake of clarity, we will not account for bid-ask spreads.
2. All our transactions are executed at the most recent closing price, updated every 5 minutes.
3. Because this is a one-time occurrence, the position is squared off at the close of the candle or the last trading price before the conclusion of the 5 minutes.
4. The costs associated with a transaction would alter with each different kind of trade. But, for the sake of brevity, let’s pretend it’s zero.

Additionally, we have established input parameters. Also, please show them to us.

Input parameters

Note that the values of the input parameters listed below are all tunable.

• Three candles are used for the high/low calculation (one candle equals every 5-minute price).
• We’ve decided that our stop-loss level will be at 50 and our take-profit level will be at +200.
• Starting in the 12th row, the spreadsheet includes the market data and trading model. Therefore, when discussing data in column D, it should be understood that the discussion begins in D12.
• The value for BTCUSDT can be found in column C.
• The highest price in the preceding three candles is shown in Column D, labeled “3 Candle High.”
• In column E, the lowest price over the previous three candles is shown.
• The signal to trade is in column F.
• If cell D13 contains a blank, the formula =IF(D13=”,, “”IF(C13>D13, “Buy,” IF(C13D13, “Sell,” “)) will generate a buy signal for BTCUSDT if the price of BTC is higher than the price of USDT on the third candle, and a sell signal for BTCUSDT if the price of BTC is lower.
• The starting point cost is shown in Column G. The trading signal is generated at this price.
• The formula is: IF (H13=H12, G12, IF (OR (H13=”Buy,” H13=”Sell”), C13, “”) translates as follows: – if the entry in cell H13 is the same as H12, then G13 should contain the value from cell G12; otherwise, – if the entry in cell H13 is either “Buy” or “Sell,” then G13 contains the value from cell C13 (the BTCUSDT price); otherwise.
• The current status of the transaction is shown in column H. Based on the assumptions and input data we’ve provided, we’ve calculated four possible outcomes: “Buy,” “Sell,” “TP (Take Profit),” and “SL (Stop Loss).
• Here’s the formula:
• IF(H17=”Buy”, IF(C18G17+$C$4, “SL”, IF(C18>G17+$C$5, “TP”, H17)), IF(H17=”Sell”, IF(C18>G17-$C$4, “SL”, IF(C18>G17-$C$5, “TP”, H17)), IF(H17=””)))
• It boils down to the following if we’re being literal:
• Select the value in F18 if the corresponding field in H17 is blank, TP, or SL (the F column has either buy or sell or blank values). If not, go to the subsequent if statement.
• If the entry in H17 is “Buy,” indicating a buy position, and the asset’s price drops below the stop loss limit, the trade is closed at the stop loss, and if the price rises over the take profit limit, the trade is closed at the take profit.
• In a similar vein, if you have a “Sell” position and the asset price goes up above the selling price beyond the stop loss limit, you should close the trade at the stop loss, and if it goes down below the selling price beyond the take profit limit, you should close the trade with a profit.
• The trade’s profit or loss is shown in Column I. Only when we have resolved all open trades can we determine our P/L. The equation may be summed up as follows: =IF(OR(H13=”SL”, H13=”TP”), IF(H12=”Buy”, C13-G12, IF(H12=”Sell”, G12-C12, 0)), 0. If the status in column H is “SL” or “TP,” then the first if statement evaluates to true; otherwise, the value in the cell is 0.
• If the stop loss or take profit condition is met, then the following series of if conditions determine the amount of profit to be made. If column H reads “Buy,” then subtract C13 from G12 to determine profit or loss.
• Remember that the price you transacted (“Buy”) can be found in column G and that the current BTCUSDT market data can be seen in column C. In this case, the profit or loss is calculated by subtracting the selling price from the cost.
• If the value in column H is “Sell,” then the gain or loss is determined by subtracting the sale price (for shorting) from the purchase price (for covering the short) to bring the position to zero.

The total earnings are totaled in column J.

Outputs

Several measures of performance are included in the table produced as a result. The total loss from losing transactions is $35405, while the total profit from winning deals is $41850. The overall P/L is $6445 ($41850 – $36505).

All deals that resulted in a negative net gain are considered losses. To trade profitably means to make a profit from your investment. Since we have assumed that transaction costs are zero, the average profit is $13.45 across all trades.

Archive available for download:

Candlestick Charting Excel Template

Conclusion

You may learn a lot about the market’s past behavior by studying a candlestick chart before you make any trades. For example, the momentum of a price movement may be seen by looking at a candlestick chart, which displays the open, high, low, and close values for a specific time period.

Our Momentum Trading Strategies course is a must-have if you’re interested in putting the momentum trading strategy to work for you. This momentum trading course will teach you how to develop momentum strategies using time series analysis and cross-sectional analysis for trading stocks, stock indexes, fixed income, and commodities futures. Furthermore, you will gain expertise in the quantitative analysis of time series, portfolio returns and risks, and the creation and backtesting of momentum trading systems.