Many traders think that the most complicated strategy is the one that works best. However, from experience, simple strategies, such as the 3 candle strategy are the best. The reason is that you don't need to rely on many different indicators to catch the perfect trade entry point. Besides working with too many indicators can draw you away from your primary objective – making money.
One of the simple and effective trading strategies I use is the 3 candle strategy. That's my focus in this guide today.
Contents
What is the 3 candle strategy?
This strategy is based on candle charts. So you won't be using line or area charts when implementing it. If you're new to different types of charts, take a look at these two articles:
Guide to the IQ Option Price Charts
Candle Stick Patterns You Will Come Across When Trading on the IQ Option Platform
The 3 candle trading strategy uses 3 same-colored candles that appear consecutively. Use the Japanese candlestick chart. In addition, these are full-bodied candles (or have relatively short shadows). The reason why we use 3 consecutive candlesticks is that they're more accurate to read than special candles.
Now on the IQ Option platform, your first objective is to identify a trend. If it's a downtrend, the candles will have red bodies. Uptrends will have candles with green bodies. Along with the trend, you'll need to identify 3 consecutive candles of the same color. Once you reach the third candle, your trade should be against the trend because the fourth candle in that sequence is likely to be of the opposite color.
This strategy's rules are similar to a coin toss. The first toss produces a 50/50 chance of either heads or tails. If the first toss is heads, the probability of the second toss resulting in heads drops to 25%.
The third toss resulting in heads further drops to 12.5%. As you continue tossing the coin, the probability keeps dropping. That's how the 3 candle strategy works.
If you get 3 consecutive candles of the same color, chances that the fourth will be of the same color have dropped significantly. That's why you should enter a trade betting on the opposite color.
What is a 3 candle reversal?
The idea of 3 candle reversal is actually the essence of today's strategy. Similarly, one can ask what is the 3 candle rule? The answer is the same. The market in a given interval draws a candle. The candle is either up or down. If a sequence of the same 3 candles appears on the chart it is quite likely that at least a short term reversal will occur. This short term reversal is when we should have an option open in the opposite direction to these 3 candles of the same colour.
An example of how to apply the rule of 3 candles on IQ Option
You will be working with trends. So, it's a matter of identifying which candles are dominating at a certain time (green for uptrends, red for downtrends). Ignore the price and only focus on the candle color.
Now, similar to the coin toss, your objective is to predict the color of the next candle. Since you don't know exactly what it is, you'll refer to the previous three candles. If the previous three are red, chances are that the next candle will be green. Take a look at the chart below.
Where to enter your trades: If you have 3 consecutive red candles, your trade entry point is at the end of a candle. That is right when the next candle is starting. As you might have guessed, you should place a higher trade. If there are 3 consecutive green candles, your lower order should come right after the third candle ends.
What if your trade loses? Enter the same order for the next candle. So if you have 4 consecutive green candles your trade entry point should be at the end of the fourth candle. Still, it should be a put order.
The use of martingale money management with 3 candle strategy
It is possible to use the martingale for this 3 candle strategy. I wrote a while ago that after a losing position, another trade should be opened in the same direction. The martingale will consist of increasing the amount to compensate for the loss made in the preceding transaction. Let us assume that the first transaction after the appearance of 3 candles of the same green colour resulted in a loss of $3, because this was the set amount for this option. For the next transaction, we will use a multiplier of the position size x3, so the amount will be $9. If this second transaction is successful and the option payout was 80%, the net profit will be:
-3$ (first trade) + 9$ x 80% (second trade) =
= – 3$ + 7.2$ = 4.20$
If this second trade also ended in a loss, the amount for the third option trade would be 3 x $9 or $27. If the third trade finally ends in a series of successes, then we have reached:
– 3$ – 9$ + 27$ x 80% = 9.60$
Tips for trading using the 3 candle strategy on IQ Option
Before implementing this strategy, you should first analyze the chart's history. Do you see trends that apply to the 3 candle strategy. It also helps to know if there's upcoming news or events which might affect your currency pair. If there's any, avoid trading that pair.
Remember that you won't be following the prices. Rather, it's the candle color. Your entry points should be right where the third candle ends and the fourth begins. This means just a few seconds to react.
You might be tempted to increase your trade amount after a losing trade. Doing so might be dangerous. What if the next trade loses? The best thing is to stop trading and analyze the chart looking for the next favorable 3 candle pattern.
Have you traded using the rule of 3 candles pattern? If so, share your experience with 3 candle strategy in the comments section below.
Good luck!