Five-Candle Breakout Strategy is traded on the lower time-frames, wherever a range can be defined by support and resistance levels.
Traders who trade this strategy seem to prefer the 5m, 15m, 30m or H1 charts.
Analyzing the Five-Candle Sequence
A sequence of five candles: three red candles followed by two green candles. The three consecutive red candles indicate a downward trend, with each candle closing lower than the previous one.
This pattern suggests that sellers are dominating the market, driving prices down.
However, following the three red candles, we see a shift in momentum as indicated by two consecutive green candles. These green candles represent a reversal in market sentiment, with buyers beginning to take control and pushing the prices up.
This change could signal the beginning of an upward trend or a potential reversal in the market.
Strategic Trading Points: Entry, Stop-Loss, and Take-Profit
- Entry Point: The ideal entry point for a trade based on this pattern would be after the close of the fifth candle (the second green candle). This position is chosen because it confirms the potential reversal of the downtrend and indicates that an upward trend may be starting.
- Stop-Loss: The stop-loss should be placed just above the high of the third red candle. Setting a stop-loss here helps limit potential losses if the market does not move in the anticipated direction and instead resumes the downtrend.
- Take-Profit Points: Take-profit levels should be set at key resistance levels identified on the chart. These are levels where the price has historically struggled to break above. By setting take-profit points at these levels, traders can lock in profits before the price potentially reverses due to selling pressure at these resistance zones.
What do the candles tell us?
Because the five-candle strategy is a break-out trading strategy, the candles inside the support and resistance lines indicate a resting, coiling or ranging phase.
A resting phase can be the result of market indecision or a wait-and-see phase, where traders wait for news or information that will move the market, while the breakout candle indicates that the resting phase is over and momentum is about to resume.
Strategy
- Shorter time-frames;
- Wait for momentum to occur;
- Define a range (coil of candles or rest phase) in the momentum;
- Mark support and resistance levels;
- After break-out from support or resistance in the direction of the preceding momentum, wait for 4-5 candles;
- Enter a buy or sell order above the highest or below the lowest candle (including candle shadows) plus spread, in the direction of the momentum;
- Stop is 2-5 pips plus spread away from the breakout level, depending on the direction of the trade;
- Target is between 5 and 20 pips depending on time-frame;
- Close the trade before the end of the session;
- Honour your risk management rules.
The 5 candles after the breakout actually form a ranging retest of the breakout, so there is no need to treat the five candles as a range and wait for a retest.
Note: I don’t trade any of the strategies discussed. This is only information
Master candle trading strategy