“The third candle” strategy

“The third candle” strategy

2023-04-03 • Updated

If you are familiar with the price action method, you should know the “Third candle” pattern. The pattern is proven to be simple and effective for traders. In this article, we are going to consider the strategy, which is based on this pattern.  

What is the “Third candle” pattern?

The pattern that we are going to explain is a reversal one. Traders often confuse it with the “Three black crows” or the “Three white soldiers” patterns. The main difference between them is that the “Third candle” pattern has fewer restrictions concerning the opening price of each candlestick. 

The formation of a bearish pattern that signals the reversal to the downside begins with a bearish candle (1st candle on the picture) with a higher high which should follow the bullish (“zero”) candlestick. After that, we wait for the second bearish candle which confirms the downward movement. When it is closed we may say that the pattern is implemented on the chart. The third candle is used for opening a short position.

11.jpg

Vice versa, we identify the bullish pattern. The first bullish candlestick should appear after the bearish one (“zero”). It should have a lower low. The second bullish candlestick is used as a confirmation of the reversal to the upside. The opening price of the third candlestick is the level where we open a long position.

12.jpg

Now, let's look at the algorithm of the strategy. 

The basic elements:

It’s recommended to implement the strategy during the European and American trading sessions on the intraday timeframes. Also, you should add a stochastic indicator (5, 3, 3) to your chart as a filter.

A long position’s setup

  1. At first, we are waiting for the implementation of the bullish "Third candle" pattern.
    • If the bodies of the first and second candles are very small – you shouldn’t enter the market, because it shows that bulls are losing their strength.
  2. Secondly, we look at the Stochastic oscillator. Its lines should move up.
  3. If all conditions are met, we enter a long position at the opening price of the third candlestick.
  4. We place a stop loss below the low of the first candlestick.
  5. We recommend to trail the level of take profit and close the position when you see the signs of the reversal to the downside (a crossover of the Stochastic oscillator in the overbought zone or reaching the strong resistance level).

Below we provided an example of the strategy.

900-2.jpg

On the H1 chart of EUR/USD, we noticed that the low of the bullish candlestick inched lower than the low of the previous bearish one on February 28. The second candlestick confirmed the move to the upside and the stochastic is moving up.  We opened a long position at the opening price at 1.13818. The level of stop loss is placed at the low of the first candlestick at 1.1366. We trailed the level of take profit and closed the position a little bit below the resistance level at 1.1399. 

A short position’s setup

The scenario of opening a short position is similar to the one described above. Follow these steps: 

  1. Wait for the bearish “Third candle” to be implemented.
    • As with the long trade’s scenario, the bodies of the first and the second candles should not be small.
  2. The Stochastic oscillator should go down.
  3. We open a short position at the opening price of the third candlestick.
  4. We place a stop loss above the high of the first candlestick.
  5. We take profit when we suggest that the price may reverse to the upside soon (for example, strong support is reached or the crossover of the Stochastic indicator happens in the oversold zone).

The example of a short trade is shown in the chart below.

900.jpg

On the H1 chart of EUR/USD, we can see the formation of the "Third candle" pattern. Also, we noticed that the stochastic oscillator was moving down. We opened a short position at the opening price of the third candle at 1.1141. Stop loss is placed at the high of the first candlestick at 1.1158. We trailed our position and closed it when a stochastic oscillator was about to form a crossover within the oversold zone. We closed it at 1.1098.

 Additional tips

  1. If the price stays at approximately the same level 5 bars after the entry, you need to close your position.
  2. It is not recommended to trade within 30 minutes before/after the important release (news).

 Conclusion

The "Third candle" strategy represents an easy type of price action method. It is very understandable and may help with your intraday trading decisions.

Similar

Pin Bar Trading Strategy
Pin Bar Trading Strategy

Sometimes a chart or a candlestick pattern may provide a decent entry signal if it is located at a certain level. A pin bar is one of the most reliable and famous candlestick patterns, and when traders see it on the chart, they expect the price to change its direction soon.

Money Flow Index Trading Strategies
Money Flow Index Trading Strategies

Among hundreds of different indicators and technical tools for traders, the relative strength index (RSI) is one of the most popular due to its simplicity and, at the same time, its power in various trading cases. In this article, we want to tell you about another powerful tool similar to RSI but with some cool tweaks.

Easy Intraday Strategy (Candlestick Patterns + RSI)
Easy Intraday Strategy (Candlestick Patterns + RSI)

There are a lot of valuable strategies that require the knowledge of candlestick patterns and oscillators. However, not of them are profitable. When you start trading with them, you can face situations when the strategy is not moving your way.

Frequently asked questions

  • How to open an FBS account?

    Click the ‘Open account’ button on our website and proceed to the Personal Area. Before you can start trading, pass a profile verification. Confirm your email and phone number, get your ID verified. This procedure guarantees the safety of your funds and identity. Once you are done with all the checks, go to the preferred trading platform, and start trading. 

  • How to start trading?

    If you are 18+ years old, you can join FBS and begin your FX journey. To trade, you need a brokerage account and sufficient knowledge on how assets behave in the financial markets. Start with studying the basics with our free educational materials and creating an FBS account. You may want to test the environment with virtual money with a Demo account. Once you are ready, enter the real market and trade to succeed.

  • How to withdraw the money you earned with FBS?

    The procedure is very straightforward. Go to the Withdrawal page on the website or the Finances section of the FBS Personal Area and access Withdrawal. You can get the earned money via the same payment system that you used for depositing. In case you funded the account via various methods, withdraw your profit via the same methods in the ratio according to the deposited sums.

Deposit with your local payment systems

Data collection notice

FBS maintains a record of your data to run this website. By pressing the “Accept” button, you agree to our Privacy policy.

Callback

A manager will call you shortly.

Change number

Your request is accepted.

A manager will call you shortly.

Next callback request for this phone number
will be available in

If you have an urgent issue please contact us via
Live chat

Internal error. Please try again later

Don’t waste your time – keep track of how NFP affects the US dollar and profit!

You are using an older version of your browser.

Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Safari Chrome Firefox Opera