The 3rd shortest candlestick strategy is purely based on price action using candlesticks.

Time frames : 4hr and daily

Instrument : You can use this strategy for any Instruments.

This trading strategy works as :

If we trade for a while, we will notice that there are days when the candlesticks will start to get very short in length compared to the previous candlesticks.

Happening of this is explained below :

• The Market may be in a strong uptrend, there will be lots of bullish candlesticks.  The market starts to slow down and this is reflected by the length of candlestick becoming very short. (Difference between high and low becomes less).
• In a downtrend market, there will be bearish candlesticks showing on charts which a quite long but soon they start to get shorter as the market losses the downward.

 

Momentum is the key here.

What we should look for is the loss of momentum. When there is a period of increasing candlesticks lengths as price picks up steam and then these changes when the candlestick lengths start to become very short happens when we lose momentum.

How to trade the loss of momentum?

Loss of momentum is a temporary thing. Where there is a loss of momentum, this is a temporary thing.. Expect the trend to continue in the same direction or the opposite direction. There are a few ways to trade the loss of momentum in anticipation of a breakout. Here we are going look and count the candlesticks .We do this by looking for the third shortest candlestick.

About the third shortest candlestick :

The third shortest candlestick is the shortest candlestick from the 2 previous candlesticks.

That means the previous 2 candlesticks should be long. i.e The difference in pips between their “highs” and “lows” are big.

In short, mean unusually short or extremely short and this depends on the time frame you are viewing the candlestick in as well.

So how we pick first candlestick then?

Start at the current candle and monitor the lengths of each candlestick that forms. Candlestick that is unusually short than the previous 2 should be noted.

Let us explain with a chart below :

There is no logic where to start count, it can be started anywhere. But the important clue is to notice that the 3rd candlestick is extremely short in comparison to the previous two candlesticks. This shortest 3rd candlestick is our trade entry signal candlestick.

Trading Rules :

• Keep an eye on candlestick formation and note its length to that of the previously formed candlesticks.
• Once the candlestick closes, if its length is unusually short in comparison to previous candlesticks, then this is a signal candlestick where we will use to place the pending buy stop and sell stop orders onboth sides to catch a breakout of price when it happens.
• Place pending stop orders on both sides of the shortest candlestick. So that we catch the breakout in any direction it moves.
• Place your stop loss anywhere from 3-5 pips on above the high for a sell stop order and below the low  for a buy stop order.
• If a breakout happens on one side, cancel the other side’s pending order that is not yet activated.
• Set take profit when price reaches 2 times what we risked. For example, if we risked 20 pips than set take profit target at 40 pips price level.  Or trail stop trades, locking profit, placing it under the low for a buy trade and high for a sell trade.

 

Buy & Sell Trade Setup Example :

Trade Management :

In the setup above, note how the trailing stop is used to lock in profits as price moves in favor of trade. For a sell trade, We 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 candlesticks high than you are out of a trade.

Pros :

• Simple and easy to understand and follow.
• The risk to reward is great when a trade goes as expected and you follow the trailing stop loss.

 

Cons :

• Need to monitor the candlestick formation for the while to notice the unusual short candlestick.
• No strategy is 100% winning strategy.