Today we are going to discuss a very simple though very effective trading system. It is called the “Three Candles” strategy. It is based on the same name pattern (you may know it under a different name). We are going to add just one indicator to this setup and see how to apply the strategy in practice.
Before reading the article and writing your questions in comments section, I recommend to watch this video. It’s not long, but covers biggest part of questions on the topic.
CHARACTERISTICS OF THE “THREE CANDLES” STRATEGY
- Platform: Metatrader 4
- Currency pairs: Any trend currency pairs
- Timeframe: Any
- Trading time: European and American trading sessions (for intraday trading)
THE “THIRD CANDLE” PATTERN
The “Third Candle” pattern is the very heart of the strategy. Sometimes people call it a reversing bar (you may also see different names of this candle). However, it is not about its name but about the figure itself.
We shall pick the first candle as the candle, which had the highest / lowest High or the Low point among the near candlesticks. We shall call the bar to the right from the first candle as the second candle. It is the confirmation bar since once it has closed, we can say that the pattern is formed. Well, the third candle is our profit.
The idea of the setup is the short-term change of the mood on the market, which provides us with an opportunity to enter the momentum and take a small profit.
• Enter the market at the beginning of the third candle after the second one has closed.
• If the line direction (5,3,3) of the Stochastic indicator conflicts the transaction, you shall skip the signal.
• If the 1st and the 2nd candles are small, you shall not enter.
• If the second candle is very large (it can be easily seen on the chart), you shall skip the signal.
STOP LOSS AND TAKE PROFIT ORDERS
• Set the Stop Loss order above/below the high/low point of the first candle.
• Set the fixed Take Profit order (it depends of the timeframe and the currency pair) at you discretion or exit after the first profit-making candle.
• If the price doesn’t move during 5 candles after the entry, leave the position.
• Stop trading for 30 minutes before and after important news are published (in case of intraday trading). Read this article to learn more about the important news.
RECOMMENDED RISK LEVEL
We don’t recommend you to put over 2-3% of your deposit on each transaction. A special indicator may help you to calculate it.
Just like the Ruler trading system, the “Three Candles” strategy is a simplified version of the Price Action trade.