A master candle (or mother bar) trading opportunity occurs where four subsequent candles form inside a preceding candle (the master candle), and the 5th to 7th candles break out of the range created by the master candle’s high and low.
A master candle set-up is validated by four inside candles after the master candle. If any of the candles (shadows included) move outside the master candle high or low, it is not a master candle set-up.
The trade is only entered if the 5th, 6th or 7th candle breaks out of the range created by the high and low of the master candle. If any of the four validating candles breaks out of the master candle range, it invalidates the trade. If the 5th to 7th candles do not break out of the range, the trade is invalidated.
What do the candles tell us?
In the master candle set-up, the candles inside the master candle “borders” tell us that there is no incentive for the market to move in any direction.
Between 4 and 7 hours (roughly a half to a full trading day) the market can be expected to find a reason to choose a direction in which to move.
When the market decides on which way to move, the breaking candle indicates the expected direction of the new momentum.
- Trade on the H1 (60min) chart;
- Mark the highest and lowest points of the master candle;
- Master candle size must be between 50 and 150 pips;
- Four following candles’ high and lows must be inside the master candle high and low;
- Fifth, sixth or seventh candles must break above or below the master candle high or low;
- Enter a long trade 5 pips + Spread above the resistance line;
- If validating breakouts happen around a support/resistance area, the trade is invalidated;
- If the SR area is nearer to the breakout than the size of the master candle, the trade is invalidated;
- If the master candles size is less than 50 or more than 150 pips, the trade is invalidated.
The general profit target is the same as the master candle size, so if the master candle is 71 pips, your target should be 71 pips. Only deviate from this profit target if the nearest price-action (PA) area differs from the master candle size, then put the target near the price-action area.
A stop-loss saves you from losing more money than your account can absorb, but also where your set-up is invalidated.
The trade is invalidated when the price moves in the opposite direction of the trade, outside the master candle high/low.
For this reason traders usually put the stop-loss 2-5 pips outside the master candle boundary.
Some traders who trade the Master Candle Strategy on GBPUSD or GBPJPY, only trade the strategy between 40 – 105 pips.
Conservative master candle traders only enter the trade after a retest of the breakout boundary (SR), not on the break.
As with all trading strategies, there are many variations on this trading strategy. You can follow the variation you like, but in the end, you need to find what works for you.
The Master Candle Strategy is not the same as the Inside Bar Strategy.
Note: I don’t trade any of the strategies discussed. This is only information