Third Shortest Candlestick Forex Trading Strategy

Have you ever noticed that there are there are days when the candlesticks on your charts get very short?

Here’s how this can happen:

• the market may be in a strong uptrend, meaning you will have lots of long green candlesticks showing on your charts.  Soon, 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). 
• the opposite but exact same thing happens in a downtrend where you will have 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

This is what we are looking for, a loss of momentum, a slowing down of the market. It can happen in 1hr timeframe up to the weekly and monthly.

So how do you trade this?

Well, you do this by looking for the third shortest candlestick.

Huh?

Yep… third shortest candlestick, you heard me right.

HOW DO I KNOW 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: start anywhere. Whatever candlestick that is unusually short in comparison to the the first 2 candlestick is the one you are interested in.

Look at the chart on the right.  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.

THE RULES OF THE 3RD SHORTEST CANDLESTICK  FOREX TRADING STRATEGY

1. Start your candlestick count.
2. Any third candlestick that is extremely short is your signal candlestick.
3. Place pending stop orders on both sides of the shortest candlestick. This is to capture the breakout in any direction price moves.
4. 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)
5. When a breakout happens on one side, cancel the other side’s pending order that was not activated.
6. 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.

Here’s an example of a buy trade setup:

And here’s an example of a sell trade setup:

Note also how the trailing stop is use on this 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.

ADDITIONAL NOTES

This strategy is similar to the inside bar trading strategy but with this one, it also allows you to trade candlesticks that  are not inside bars. Remember also that your third candlestick can be an inside bar too.

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