Contents
We will discuss our new colors trading strategy. Traders have to be good observers. They have to be able to catch the signals to open transactions on time. There exist strategies that help them in this task. Today, I am going to present a trading method where no additional indicators are needed. Only the price chart and a good eye.
Key Takeaways🔑
| →Colors trading strategy is a simple method that doesn’t require additional indicators. |
| →It involves observing the price chart and identifying patterns based on candlestick colors. |
| →Though easy to understand, the strategy still carries risks, especially when using Martingale money management. |
| →Before investing real money, test the strategy in a demo account to gain confidence and reduce risks. |
| →Always perform due diligence and consider adding extra filters to enhance the strategy’s effectiveness. |
What are the basics of colors trading strategy
The candlesticks on the price chart appear in different colors. You will notice green and red bars. A green candle means that the opening price lies below the closing price. And a red candle represents a situation where the opening price is higher than the closing price.
A series of green candles tell us about the uptrend in the market. There are, however, some red candles along the way. The price is in constant motion and it is not going in one direction without any throwbacks. Similarly, during the downtrend, you will see some green candles although the majority of the bars will be red.
Colors trading strategy explained
A strategy that is based on the colors of the candles uses the fact, that the series of one candle’s colors do not continue indefinitely. So, after a specific amount of green candles, you will open a trade for the price decrease. If you want to open a transaction for the price increase, wait for some subsequent red candles.
Set the chart timeframe for 5 minutes. You will open a position for a duration of 5 minutes as well. Digital options fit best for this strategy. Choose the asset from the most commonly used currency pairs for example GBPUSD, EURUSD, NZDUSD, AUDUSD, USDCAD, or USDAJPY.
Entering a long trade with colors trading strategy
All you need to do is to observe the chart thoroughly. Wait for the series of red candles. We will enter after the 4. red candle. You can utilize longer series when testing a strategy.
You open a transaction immediately when the 5. candle begins to form. It can happen that that candle will be red. This means a loss and you can enter the trade again at the beginning of the next candle.
Increase the investment amount according to the Martingale money management. Consider the table below.
Below, there is an exemplary chart for the eurodollar. In the first situation, I opened the position at the 5. candle and I lost. At the very beginning of the following candle, I entered again, with the amount of 3. this time I won 1.61 net profit. After the next series of 4 red candles, I entered again and won 0.87.
My recommendation is to stop trading when the 6. transaction does not bring you profit.
Opening a short position with colors trading strategy
To open a short transaction there has to appear a series of 4 green candles. You enter at the opening of the 5. candle. If it is red, you win. If it is green, you lose and try again at the next candle increasing the amount of money you invest.
Let’s look at the example. I entered a short position after the 4. green candle. I lost. For the next candle, I have increased the amount to 3. And lost again. The third time I have invested 9. Unfortunately, it was a green candle. Only the 5. candle has brought me profit. It was 30.47.
Pros and Cons 😃😔
| ✅Simple and easy to understand strategy. |
| ✅No need for additional indicators.</td |
| ✅Can be customized by adding extra filters or adjusting the number of candlesticks in the series. |
| ❌Carries risks, particularly when using Martingale money management. |
| ❌Not foolproof; losses can still occur even with the best execution. |
| Commonly Used Currency Pairs | Sample Extra Filter |
|---|---|
| GBPUSD | Exponential Moving Average (EMA200) |
| EURUSD | Bollinger Bands |
| NZDUSD | Relative Strength Index (RSI) |
| AUDUSD | Moving Average Convergence Divergence (MACD) |
| USDCAD | Stochastic Oscillator |
| USDJPY | Fibonacci Retracement |
Conclusion
Colors trading strategy described in today’s article is not very complicated. It requires only you to look at the colors of the candles. Wait for the series of candles in the same color and enter the trade. I have used 4 candles in the series. Nevertheless, you can try with another number of bars.
You can also add an extra filter to the strategy. Use, for example, the Exponential Moving Average with a period of 200. Search for the opportunities to open long trade when the price is over the EMA200 and to open a short transaction when the price goes below the indicator line.
There is always risk involved in trading. Especially when using the Martingale money management. By increasing the investment amount every time you enter the trade, you expose yourself to greater losses.
Test the strategy in the demo account. You get it totally for free on IQ Option. It is supplied with virtual cash and you can stay there until you feel confident enough to invest real money. Of course, don’t forget to share your thoughts on the colors trading strategy in the comments below the article.
Profitable trading!
Q&A
- Q1: Can I use the colors trading strategy on other timeframes?
- A1: Yes, you can adjust the strategy to different timeframes, but be sure to test it thoroughly on a demo account before applying it to real trading.
- Q2: How can I manage my risks when using the colors trading strategy?
- A2: To manage risks, you can use proper position sizing, stop losses, and a well-defined trading plan. Be cautious with the Martingale money management system, as it can lead to large losses.
- Q3: Can I use other indicators along with the colors trading strategy to improve its accuracy?
- A3: Yes, you can add extra filters like Exponential Moving Average, Bollinger Bands, or other technical indicators to enhance the strategy’s effectiveness. Be sure to test any modifications on a demo account before real trading.
- Q4: What should I do if I experience consecutive losses with this strategy?
- A4: If you experience consecutive losses, reevaluate the strategy and consider adjusting the parameters or adding extra filters. It’s essential to practice sound risk management and never risk more than you can afford to lose.
- Q5: How can I become more proficient with the colors trading strategy?
- A5: Practice the strategy on a demo account, customize it to your preferences, and learn from your successes and failures. Consider studying additional technical indicators and risk management techniques to enhance your overall trading skills.