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 which is the rule of 3 candles.
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:
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 colour that appear 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 colour.
The rule of 3 candles is based on the probability. Like tossing a coin. You toss a coin for the first time and 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 colour, the chances for the fourth in the same colour 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 colour of the candles.
Your goal is to anticipate the candle colour. Like in the 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.
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.
Hints for applying the 3 candles rule on the Olymp Trade platform
You should always come to the market well prepared. Analyse the history of the chart beforehand. Check how often you notice 3 consecutive candles of the same colour.
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 colour, 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 recognise fear of losing or 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 colour.
Now, the only thing left is to try the 3 candles rule for yourself. Remember that 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!
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