Timeframes: best for 4hr and Daily timeframes
Currency Pair: Any
Forex Indicators: none
If you’ve been trading for a while, you will notice that there are days when the candlesticks will start to get very short in length compared to the previous candlesticks.
Why this happens can be explained with these points below:
- the market may be in a strong uptrend, you will have lots of bullish candlesticks showing on your charts. The the market starts to slow down and this is reflected by the length of candlestick becoming very short (Difference between the High and Low becomes small).
- in a downtrend market, you will see lots of bearish candlesticks showing on your charts which a quite long but soon they start to get shorter as the market losses the downward momentum
The key word here is momentum.
What you are looking for is a loss of momentum. A loss of price momentum can be seen when there’s a period of increasing candlesticks lengths as price picks up steam and then this changes when the candlestick lengths start to become very short.
You can see this phenomenon in all timeframes. All you need to do is open up your charts and have a loot to see what I’m referring to you here about.
HOW DO YOU TRADE THE LOSS OF MOMENTUM?
The thing is, where there is a loss of momentum occurs, this is a temporary thing only. Expect the trend to continue in the same direction or in the opposite direction.
There’s a few ways to trade the loss of momentum in anticipation of a breakout. What I’m going to show you here is by looking and counting the candlesticks.
Well, you do this by looking for the third shortest candlestick.
WHAT IS THE THIRD SHORTEST CANDLESTICK?
The third shortest candlestick is the third shortest candlestick from the 2 previous candlesticks before it.
This means the 2 previous candlestick should be long: The difference in pips between their “highs” and “lows” are big.
When I say short, I mean unusually short or extremely short and this depends on the timeframe you are viewing the candlestick in as well.
So how do you pick your first candlestick then?
Answer: you start at the current candle that is forming and monitor the lengths of each candlestick that forms. Whatever candlestick that is unusually short in comparison to the the first 2 candlestick is the one you are interested in.
Let me explain with a chart below:
Notice that there is no logic or order in picking where to start your count 1. You can start anywhere.
But the important clue is that notice that the 3rd candlestick is extremely short in comparison to the previous two candlesticks.
This shortest 3rd candlestick is your trade entry signal candlestick.
3RD SHORTEST CANDLESTICK FOREX TRADING STRATEGY RULES
- Watch the current candlestick forming and note its length in comparison to the previous two candlesticks that have already formed.
- After the current candlestick closes and if its length is extremely (or unusually) short in comparison to previous candlesticks, then this is your signal candlestick where you will use to place the pending buy stop and sell stop orders on both sides to catch a breakout of price when it happens.
- Place pending stop orders on both sides of the shortest candlestick. This is to capture the breakout in any direction price moves.
- Place your stop loss anywhere from 3-5 pips on above the high (for a sell stop order) or below the low (for a buy stop order)
- When a breakout happens on one side, cancel the other side’s pending order that was not activated.
- How do you place take profit target? Couple of options: take profit when price reaches 3 times what you risked. For example, if you risked 20 pips than set your take profit target at 60 pips price level. Or you tail stop your trades, locking profit, placing it under the low (for a buy trade) or under high (for a sell trade). Or you can exit after the 3rd candlestick after entry.
Buy Trade Setup Example:
Sell Trade Setup Example:
In the sell setup above, note how the trailing stop is used to lock in profits as price moves in favor of your trade.. You are trailing it behind the high of each candlestick that continues to make lower highs. As soon as a candlestick high shoots up and breaks the previous candlestick’s high than you are out of a trade.
The 3rd shortest candlestick forex trading strategy is similar to the inside bar forex trading strategy but with this, you can also trade candlesticks that are not inside bars.Note also that the third shortest candlestick can be an also be an inside bar.
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