Today I will share with you a very simple, yet quite effective method of trading. We will not use any indicators nor draw trends on the charts. What we need is a clean candlestick chart. We will look for strong candles, i.e. candles with a large body. If you identify such a candle, wait until it closes and then you should open a trade with a five-minute expiration in the direction of the strong candle. It is so simple!
Candles with a long body indicate the existence of a directional momentum. This allows you to expect that the movement will continue. After a red strong candle, we expect a further decrease in price. In opposition, we expect the green strong candle to be followed by a further increase.
We will use the candlestick chart for a five-minute time interval. Transactions should be opened immediately at the opening of the candle following the signal, i.e. after a strong candle. Additionally, we use martingale money management. Martingale can be risky, but it works quite well in cooperation with the strategy described here.
Key Takeaways🔑
| →The candle color strategy is a simple and effective trading method that uses strong candles to determine trade direction. |
| →Combining this strategy with martingale money management can increase the chances of success. |
| →Always be cautious when using martingale, as it can be risky and may lead to significant losses if not managed properly. |
Contents
Tips for successful trading with the candle color method at Olymp Trade
If you don’t know what martingale is all about, I encourage you to read our article about money management strategies. We have also created an article about popular candlestick formations. This knowledge will certainly help you to use the strategy described here effectively.
The rules are very simple. When I see that a strong candle is created I prepare to open a position on the opening of the next candle. For example, if I see a candle with a long green body is forming I set the amount, 5-minute duration, and wait patiently for this strong candle to close. I hold the cursor directly above the “UP” button to be able to click it immediately on the opening of the next candle.
What if the trade is loss-making? I am also prepared for this. According to the martingale money management table, I increase the amount for the next trade to be able to open a new trade immediately at the opening of the next candle. And so until the moment when a profitable transaction appears. A profitable transaction compensates the cost of previous loss positions. This is a direct result of money management.
Another important principle is to observe changes in candle colors. For example, if I opened a down position and got a profit, I will wait for a strong green candle to appear for the next position. If this occurs, the next trade will assume an upward price direction. And so on.
On the chart below I marked a sequence of 4 signal candles, after which it was necessary to open the positions immediately.
Trades carried out step by step
A strong growth candle gave us a great signal to open a UP position. The next candle was bullish. The transaction was successful. So we are waiting for another signal, this time for a strong bearish candle.
A strong downward candle appears after a period of market indecision. The body of this candle is so large that it contains the bodies of the six previous candles. This is not a requirement of course, but it is an additional strong signal for a price decrease. The DOWN position is opened at the opening of the next candle and ends in a profit again. The market continues to decline.
Another third opportunity appears after the market has slowed down. After two undecided Doji candles, an upward long-body candle appears. We open another position at the opening of the next candle and again enjoy success.
After a series of rising candles, a red candle with a long body appears. At the opening of the next candle, we open an order for the price decrease. Unfortunately, this time we end up with a loss. Under the strategy’s assumptions, we immediately open another order for an increase. Again, it is a failure. Only the third transaction for this signal brings profit. Thanks to the use of martingale money management, the profit from this transaction covers the losses from the previous ones and also gives us a pure profit, which will increase our account balance.
Which candles you should avoid using this strategy
I mentioned that the basic principle of this method is to identify strong candles. Strong means here such candles which show strong directional momentum. Visually, these are candles which have relatively long bodies. Only these candles can be a signal. Candles such as Doji, hammer, spinning tops, and the like (see the picture below) cannot be used as a signal to trade in this strategy.
Remember also that trade is to be initiated immediately after the signal candle so that the five-minute trade is open exactly for the duration of the next full candle.
Pros and Cons of the Candle Color Strategy👍👎
- Pros:
- Simple to understand and implement, making it suitable for beginners 😊
- Does not require any complex indicators or trend lines ✅
- Provides clear entry signals based on strong candles 📈
- Can be combined with martingale money management to potentially increase profits 💰
- Cons:
- Relies solely on candlestick patterns, which might not always be reliable 📉
- The martingale strategy can lead to significant losses if not managed properly 😰
- May not work effectively in all market conditions, especially during periods of high volatility ⚠️
| Candlestick Patterns to Trade | Candlestick Patterns to Avoid |
|---|---|
| Long body candles (Green or Red) | Doji candles |
| Candles with a large body in the direction of the trend | Hammer candles |
| Candles with a strong directional momentum | Spinning tops |
Again about martingale money management for a candle color strategy
Below I present the table of increasing the amount for subsequent transactions in the series after the signal candle.
In the previously presented sample trades, we had 4 signal candles. The first 3 signals generated 3 profitable transactions (at the investment amount of 1$ it gave a total of 3 x 0.82 = $2.46). The fourth signal made it necessary to use martingale. In the first transaction, the amount was 1, but the transaction ended in a loss. The amount for the second transaction was increased to 3 and we also suffered a loss. Only the third transaction made a profit and according to our table, the net profit after deduction of losses from previous transactions was $3.38.
Please note that sometimes the signal will generate 3 and sometimes 5 losses in a row. The cumulative cost of such trades is a lot of money. Before you start using this money management model, decide whether it corresponds to your personality.
The strategy described here is a simple method of trading. It does not require much knowledge or experience. Remember, however, that training makes you a champion. Open a demo account with Olymp Trade today. There you can test the presented method without any risk.
We wish you great success on the market!
Q&A: Frequently Asked Questions 🤔
- Q: Can I use this strategy on other timeframes?
- A: Yes, but the strategy is designed for a five-minute timeframe. Results may vary when using other timeframes. Always backtest before applying it to other timeframes.
- Q: What is the risk of using the martingale money management strategy?
- A: Martingale can lead to significant losses if not managed properly. Ensure you have a stop-loss in place and never risk more than you can afford to lose.
- Q: Can I combine this strategy with other trading strategies or indicators?
- A: Yes, you can combine this strategy with other strategies or indicators to improve its effectiveness. However, always backtest and adjust your risk management accordingly.
- Q: How can I improve my success rate with this strategy?
- A: Practice and backtest the strategy in various market conditions, use proper risk management, and consider combining it with other strategies or indicators to improve its effectiveness.
- Q: Can I use this strategy for stocks or other assets?
- A: While the strategy was designed primarily for forex trading, it may work for other assets like stocks or cryptocurrencies. However, always backtest and adjust your risk management accordingly.