Complicated does not mean good. Some are looking for the most demanding strategies, believing they are the most effective ones. But I ask; what for?
Why complicate a thing that can be easy. There are some really good strategies that are pretty simple and do not need further indicators. In addition, using an excessive number of indicators can distract your attention and you do not want that.
Today, I would like to show you one of these simple strategies: the rule of 3 candles.
Key Takeaways🔑
| →The Rule of 3 Candles is a simple, yet effective trading strategy. |
| →This strategy involves anticipating the color of the next candle based on the previous three. |
| →It is crucial to practice this strategy using a demo account before trading with real money. |
Contents
The 3 candles rule overview
As the name implements, the strategy requires candles. So the chart you should set is Japanese candlesticks. It will work here best.
You may read more about existing chart types in the following articles:
4 Chart Types you can use on the Olymp Trade platform
#1 Guide to recognizing most common candlestick patterns on Olymp Trade
Our focus is on candles. For the rule of 3 candles to be effective, the 3 candles have to develop successively. Moreover, they have to be without or with really short wicks. This makes the strategy more reliable.
Your task is to observe the candles and to recognize the trend. The candles will be green when we are talking about the uptrend. They will be red when you encounter the downtrend. Now, you just have to wait for three successive candles in the same color that appears along with the trend. After the third candle develops, it is time to open the trade opposing the trend. The next candle most probably will be of a different color.
The rule of 3 candles is based on probability. Like tossing a coin. You toss a coin for the first time and the chances of heads and tails are 50/50. But when it is the heads at the first toss, the probability of heads in the second toss falls to 25%. If it is again the heads the second time, the probability for heads in the third try will continue dropping. It will be 12.5% this time. And with every toss, it will fall further down.
This is how our strategy works. When there are 3 candles in the same color, the chances for the fourth in the same color are very small. So you trade against the trend.
The rule of 3 candles at Olymp Trade
You need to identify the trend so you are looking for the candles that are in dominance. The green ones indicate the uptrend and the red ones the downtrend. You do not even have to worry about the price. Just about the color of the candles.
Your goal is to anticipate the candle color. Like in tossing the coin, you predict will it be the heads or tails. Your judgment will be founded on the preceding 3 candles. When you notice three green candles, you expect the next one to be red. Analogically, when the three consecutive candles are red, the chances the fourth one will be green are relatively high.
Check out the above chart. There are quite a lot of entry points during just a little over an hour.
Entry points
You should enter the trade when the third candle is finished, that is just in a moment the fourth candle starts to develop.
With three consecutive red candles, you should go long. Whenever you observe three successive green candles, you should open a short position.
The probability of winning is pretty big. But what to do when you lose anyway? You just play along. Remember, that the probability of heads is dropping with every toss? Here is the same. Imagine, you spot three successive green candles and you go short. But you lose. The fourth candle is still green. Open another short position at the beginning of the fifth candle. And so on. Until you win.
Pros and Cons of the Rule of 3 Candles Strategy📊
Pros👍:
- Simple to understand and apply, even for beginners.
- Does not rely on complex indicators or charts.
- Based on probability, providing an edge when used consistently.
Cons👎:
- Not always accurate, as market behavior can be unpredictable.
- Requires quick decision-making, which can be stressful for some traders.
- Dependent on trends; may not work as well in a sideways market.
| Factors for Successful Application | Common Pitfalls |
|---|---|
| Consistent application of the strategy. | Inconsistency in strategy application. |
| Understanding market trends and patterns. | Ignoring market trends and patterns. |
| Practicing with a demo account before live trading. | Jumping into live trading without adequate practice. |
Hints for applying the 3 candles rule on the Olymp Trade platform
You should always come to the market well prepared. Analyze the history of the chart beforehand. Check how often you notice 3 consecutive candles of the same color.
Check also the news calendar. Maybe there is something about to be announced what will influence the asset you are trading. If this is the case, change the asset.
You focus on color, not on the prices. You open the position right in the moment of the opening the fourth candle. You have to be fast here. You have just a few seconds to make a move or you risk losing the trade.
Do not trade with the emotions. If you recognize fear of losing or the need for increasing the investment amount after losing, it will be optimal to pause trading for a moment. Take a deep breath and wait for the new opportunity, which means another three consecutive candles of the same color.
Now, the only thing left is to try the 3 candles rule for yourself. Remember that you will most likely lose the first few times, as you’re still getting the hang of the strategy. This strategy is not a magic pill to immediately increase your balance.
However, Olymp Trade offers a free demo account where you can practice without risking your money. You can also tell us about your experiences in the comments section that you will find down below the site.
Enjoy the trading!
Q&A about the Rule of 3 Candles Strategy📌
- Q: How often should I use the Rule of 3 Candles strategy?
- A: As with any trading strategy, it’s best to use the Rule of 3 Candles consistently for the best results. However, always take into account market conditions and other relevant factors.
- Q: Can I use this strategy with other trading strategies?
- A: Yes, you can combine the Rule of 3 Candles with other strategies. However, ensure you understand both strategies fully before combining them.
- Q: What is the best time frame to use this strategy?
- A: The Rule of 3 Candles can be applied on various time frames. However, it’s often used on shorter time frames for day trading.
- Q: Can I use this strategy for all asset types?
- A: While this strategy can be used for various asset types, it’s essential to understand the specific characteristics and trends of the asset you’re trading.
- Q: What should I do if I make consecutive losses with this strategy?
- A: All trading strategies can lead to losses. If you’re experiencing consecutive losses, it might be best to pause trading, reassess your strategy, and practice more with a demo account.