The third strike trading strategy is based on this reversal chart pattern where:
- In a downtrend, price will be making those decreasing swing lows and then on the third swing low, it makes a drastic move upwards.
- Similarly, in an uptrend, price will be making peaks of increasing heights and then on the third peak, it tends to make a drastic move dowards.
- The key to finding out where this 3rd swing low or peak would be is to use a trendline.
Timeframes : All
Instrument : you can trade any instrument
Trading Rules:
Long entry :
- Market will be in a downtrend
- Lower swing lows will form
- When two lower swing lows form, you connect them with a trendline and wait to see if price comes to touch that trendline on the 3rd point, if it does so go to step 4.
- Buy immediately at market price as soon as trendline is touched or you can wait until the candlestick that touch point 3 has closed before using a buy stop order.
- Place your stop loss at least 10-20 pips under the low of the candlestick if you used the market order or if you use the buy stop order then place it at least 5-10 pips under the low of that candlestick.
- Your take profit target options would be the previous peaks or swing highs that the price made.
Let us explain with a chart below:
Short Entry :
- Market will be in an uptrend
- Higher swing highs (increasing peaks) will form
- When two peaks form, you connect them with a trendline and wait to see if price comes to touch that trendline on the 3rd point, if it does so go to step 4.
- Sell immediately at market price as soon as trendline is touched or you can wait until the candlestick that touch point 3 has closed before using a sell stop order.
- Place your stop loss at least 10-20 pips above the high of the candlestick if you used the market order or if you use the sell stop order then place it at least 5-10 pips above the high of that candlestick.
- Your take profit target options would be the previous swing lows that the price made.
Let us explain with a chart below:
Pros :
- The risk reward of this trading strategy is really good when trade goes as planned. Even if you lose, your loss will be small because stop loss is tight.
- Can easily bag hundreds of pips easily in a hours in a market that is strongly trending.
Cons :
- As usual, there will be false signals and you can get stopped out with a loss and hopefully loss is manageable if you trade with money management in mind.
