Candle 1 - Closes down
Candle 2 – A lower low and a lower high
Candle 3 – Breaks the high of the first candle and finishes below the close of the second candle.
What does this Pattern Reveal?
We say this is a powerful pattern as it shows the building bullish or bearishness in the terms of momentum. This has also been coupled with a failed test of the opposite high or low. These areas can be great entry points for the trend and they already have a built in 2B Failed Breakouts which we will discuss further in another article.
How to Trade
You will want to use this strategy using long time frames such as the 4 hours as this will give you lasting trend reversals and not just the white noise of the general market movements. To enter the trade one method would be to enter right after the close of the third candle if it follows the pattern. The exit will be taken after the close of the next candle so you would be in the trade for a 4-hour period. This would be a strategy for holding for a short period but you can also use a distance for the take profit so it lets the profits ride further.
You can use the first method in a backtest to see how this method would work against a series of different currency pairs. Looking at the results you can see that the returns against a few currencies such as USDCHF and EURUSD on a 5 year back test. This method will not produce amazing returns on its own due to the amount of trades it takes but it can be added into any portfolios of strategies to create a great trading system.
We have already gone through the different types of candlesticks that can appear on your chart and what they mean but below we will look at a new way of trading these candles. One thing to be wary of is candlesticks themselves offer no statistical winning edge but can be used in combination with other indicators and patterns to confirm these signals and pick entry and exit points. On longer time frame combined with support and resistance levels can produce profitable results.
Although you mainly want to use these in combination with other strategies, even single candles can give you a good indication of what will happen. The best way to test, after the first candle you will want to track at least the next if not, the series of candles after. Many will want to track multiple candles to stop false signals from new trends forming.
The 3 Soldier Retest Pattern
This is one of the lesser known patterns but can be one of the most powerful in predicting. The pattern itself is fairly simple consisting of three candles in the following patterns.
Candle 1 -Closes up
Candle 2 – A higher low and a higher high
Candle 3 – Breaks the low of the first candle and finishes above the close of the second candle.