Today I would like to share with you a strategy that I have been using for some time now. We will not use any indicators. All you need is a good eye to distinguish between up and down candles. We described the Candle Color strategy on the blog. Today’s strategy, like Candle Color, is based on chart observation.
Key Takeaways🔑
| →The Candle Color Modified strategy relies on the observation of candle color patterns. |
| →Position opening is based on a series of 4 similar colored candles, indicating a reversal. |
| →Additional filters such as EMA200 can be used for improved strategy effectiveness. |
| →Always practice strategies on a demo account before implementing them on live trades. |
Contents
The idea of a modified Candle Color strategy
The candle color, you might have heard several times already, indicates whether the close price is higher or lower than the opening price. If it’s red then it means that the close price was lower than the opening price while if it’s green then it represents that the close price was higher than the opening price.
Take a look at the EURUSD chart below. In fact, you can look at any other chart to see that sequences of candles in one colour do not last forever. Price doesn’t go up or down continuously. Even with a strong uptrend, there are downtrend red candles along the way. Similarly, in a strong downtrend, there will be some upward candles.
This phenomenon is used in today’s strategy. After a series of n-green candles, a position is opened for a downward price movement on the following candle. Conversely, after a series of n-red candles, an upwards position is opened on the following candle.
We will use 5-minute charts. The best instruments to trade are popular currency pairs such as EURUSD, GBPUSD, AUDUSD, NZDUSD, USDJPY, USDCAD. We will trade using Fixed Time Trades with a length of 5 minutes to include a full 5-minute candle in the trade.
Instructions for opening a position for the price increase
I mentioned the n-candles series in one colour. For n we will take 4. When testing the strategy you can use longer series, e.g. 5 or 6 candles in one colour. We observe the chart and wait for 4 down candles (red) to appear. As soon as the fourth candle closes and the fifth candle opens we open a position for an upward price movement. In the event that the 5th candle also goes down, we have a loss. To offset this loss on the 6th candle we again open an upward position. This time, however, we increase the size of the position according to the table attached below, which provides for up to 6 trades in a series.
If the 6 trades end in a loss, I recommend stopping trading for the day.
In the graph above you can see two situations. In the first, four downward candles appear. According to the strategy, we open a position for an increase on the fifth candle. The initial amount for the trade is 1. This trade ends in a loss. The amount for the next transaction is 3. The second transaction results in a net profit of 1.46. In the second situation, the first transaction is successful and ends in a net profit of 0.82.
Instructions for opening a position for the price decrease
First, we need to identify a series of 4 upward candles. If these occur we open a short position on the fifth candle. If the position ends in a loss we increase the position size according to the table and continue trading on the next candle. This continues until an upward candle occurs that gives us a profit on the position (or the maximum number of trades in the series is exhausted).
The image above shows a series of 4 upward candles. On the fifth candle, we open a short position. Unfortunately, this resulted in a loss of 1. So we open another short position with an amount of 3. And another loss. We open third on falls from amount 9. And again a loss. The fourth position also ends in a loss. In total in these four positions, we have already lost 40 dollars. Fortunately, the fifth transaction compensates for the previous losses. The net profit on this series of transactions would be 26.42.
👍 Pros and 👎 Cons of the Candle Color Modified Strategy
👍 Pros:
- Relatively simple to understand and implement.
- Doesn’t require any indicators or complex charting methods.
- Allows for flexible adaptation with other filters like EMA200 for increased efficiency.
- Can be used across various currency pairs and time frames.
👎 Cons:
- Relies heavily on the accuracy of observing candle patterns, which can be subjective.
- The martingale aspect of the strategy can lead to large losses.
- The strategy might not perform well in highly volatile markets.
- Requires constant monitoring of charts for candle patterns.
| Variable | Details |
|---|---|
| Strategy Name | Candle Color Modified Strategy |
| Underlying Principle | Observation of color patterns in candles |
| Position Entry | Based on a series of 4 similar colored candles |
| Risk Management | Martingale position sizing |
| Additional Filters | EMA200 and others as per preference |
Additional filters and risk of martingale
It is very important in this strategy to practice it on a demo account. The strategy has great potential, but using money management based on loss compensation always carries the risk of losing large funds.
Remember that you can open positions after a fixed series of candles of the same color (it does not necessarily have to be 4). In addition, you can introduce additional filters to increase effectiveness. Such a filter could be, for example, the EMA200. If the price is above it, you are only looking for opportunities for long positions. If the price is below the EMA200, you look for opportunities to take short positions. Train and test. Also remember, that the best times to trade currencies are during the European and American sessions.
We wish you fruitful trading!
Frequently Asked Questions
- Q: How many candles in a series should be observed in the Candle Color Modified strategy?
A: In this strategy, a series of 4 candles of the same color are typically observed, but this can be adjusted based on personal preferences and backtesting.
- Q: Which currency pairs are best suited for this strategy?
A: This strategy can be applied to popular currency pairs like EURUSD, GBPUSD, AUDUSD, NZDUSD, USDJPY, USDCAD.
- Q: Can other indicators be used along with this strategy?
A: Yes, additional filters like EMA200 can be used with this strategy for better effectiveness.
- Q: Is there any risk management technique involved in this strategy?
A: Yes, the strategy uses martingale position sizing for managing losses.
- Q: Should I use a demo account to practice this strategy?
A: Absolutely, it’s always recommended to practice and backtest strategies on a demo account before implementing them on live trades.