Investment Thesis

Introduction

In the complex world of stock trading, various strategies and tools are employed to maximize returns and manage risks. One such strategy involves using candlestick patterns and Bollinger Bands to determine entry and exit points for trades. This essay explores the intricacies of a trading strategy based on these technical analysis tools, focusing on candlestick patterns for market sentiment and Bollinger Bands for price volatility and trend analysis. The strategy also incorporates systematic profit-taking and stop-loss mechanisms to enhance performance and manage risks effectively. 


Candlestick Patterns
Candlestick patterns are graphical representations of price movements in a specific period, providing insights into market sentiment and potential price reversals. This strategy utilizes several key candlestick patterns to inform trading decisions: 

Inverted Hammer: This pattern forms after an uptrend and signals a potential reversal. It is characterized by a small body at the upper end of the trading range and a long lower shadow. The strategy enters a position when this pattern appears, anticipating a downward reversal. 

Hanging Man: Similar to the Hanging Man but appears after a downtrend, suggesting a potential upward reversal. It has a small body at the lower end of the range and a long upper shadow. 

Dragonfly Doji: Indicates a potential reversal during a downtrend. It has a long lower shadow and a close near the open, signaling indecision that may lead to a bullish reversal. 

Bullish Engulfing: A two-candle pattern where a small bearish candle is followed by a larger bullish candle that engulfs the previous one, indicating strong buying pressure and a potential upward reversal. These patterns are used to identify favorable entry and exit points, leveraging the historical reliability of these patterns to predict future price movements.


Bollinger Bands 

Bollinger Bands consist of a middle band (usually a 20-day simple moving average) and two outer bands representing two standard deviations from the middle band. These bands adjust to market volatility, expanding during high volatility and contracting during low volatility. The strategy employs Bollinger Bands to: 

Confirm Trends: Prices touching or breaking through the upper band can signal an overbought condition, while touching the lower band can indicate an oversold condition. Combining this with candlesticks, we get strong bullish/bearish signals.

 Systematic Profit-Taking and Stop-Loss Mechanisms 

To manage risks and lock in profits, the strategy incorporates systematic profit-taking and stop-loss mechanisms: 

Profit-Taking: 

Positions are partially liquidated when they achieve a 30% unrealized profit. This ensures that gains are realized systematically, reducing the risk of losing profits during market corrections. Stop-Loss: Positions are fully liquidated if they incur a loss exceeding 20%. This mechanism limits drawdowns and protects the portfolio from significant losses.