What is a Master candle?
First at all we are going to describe what is a master candle. Basically these are candle with big bodies and wicks (the sticks over and under the bodie of the candle) marking a new high or a new low and whose extension or range covers out the following 4 or more candles. To better understand the concept of master candles we can observe the following image:
- 1 candlestick chart of 1 hour for volatile currency pairs like GBP/JPY.
Trading system rules
- Identify a master candle with at least 4 candles inside its range.
- Draw a line in the high and the low of the master candle (including the wicks) to stablish a range.
- Wait until there is a breakout in the range of the master candle and open a position in the direction of that rupture.
- Stop loss: The creator of this strategy sets a stop loss of 50 pips, however that can be adjusted depending on the market conditions and the instrument.
- Take profit: In this case the author recommends a take profit of 50 pips. But as in the case of the stop loss that can be adjusted depending on the instrument and the market conditions.
- The levels of the stop loss and take profit can be adjusted according of the number of accumulated candles inside the range. For example if there are 7 accumulated candles, the take profit and the stop loss can be set at 60 pips. If the number of accumutad candle is 10 or more, we can increase the stop loss and take profit up to 70 pips.
Strength of the signal generated by the master candle:
- The master candle was formed near an important psychological level (for example .00, .25, .75, etc.).
- The longer the price has been within the range. At this point the author of this strategy suggests a filter of 24-hour, period after which if no break has occurred it is best to discard the pattern.
- The more times the price has bounced on the extremes of the range. For example, the more times the price has touched the maximum of the range and has been returned, when the upward breakout occurs, there are more probabilities that will be a strong movement in the direction of the breakout.
- Finally, if the maximum or minimum of the master candle touches a new minimum or maximum on a daily, weekly, monthly, yearly or even historic level (an important support and resistance), it is almost certainly that the breakout of the range of the Master candle will be an excellent signal to enter in the market.