This trading technique that can be found for free on forums and websites like this has the advantage of requiring no more than a few minutes a day so it is perfect for traders with many occupations and with no time to see charts and analyze the market all day. Furthermore, the procedure of The rule of the two candles is not complicated and can be learned very quickly.
Basically, this strategy is based in the identification of an “Inside Bar” as shown in the following image:
Trading system description
This is a simple trading technique based in the “Inside Bar“, a classic candlestick pattern. The main advantage of this strategy is that it does not require to be in front of a computer all day analyzing the market. Also, this system does not use any technical indicator therefore it is quite simple to apply. The trader only needs a candlestick chart to identify the pattern.
This trading system is based in the identification of an “Inside Bar”, so it can be used practically in any trading instrument, making it appropriate corrections for each market.
As we indicated earlier, this trading system does not use any technical indicator. The only thing we need for its application is the following:
- A 8 hours candlestick/bar chart.
Trading system rules
- The first thing to do is open an 8 hours chart at 6:00 am GMT in order to detect an Inside Bar (a bar or candle which range is within the range of the bar that precedes it). You can see examples of the Inside Bar in the previous figure.
- After identifying the Inside Bar, the trader must observe the closing of the previous bar. If the closing of the previous bar was above the opening of the same bar (bullish bar), the trader should try to open a buy position. On the contrary, if the closing of the previous bar was bearish (the closing of the bar was below the opening), the trader should try to open a sell position.
- In case the previous bar was bullish, we place a buy order about 10 pips above the high of the Inside Bar and a stop loss of 5 pips below the minimum of that same bar. If the previous bar was bearish, the trader must apply the reverse process, ie place a sell order about 10 pips below the low of the Inside Bar and a stop loss of 5 pips above the maximum of that same bar.
- After entering the orders, the trader can let the trade to develop by itself until 14:00 GMT. At this time the trader must verify if any of the orders have been activated or not. In this case we have two possible scenarios:
- If the entry order has not been executed, the trader must cancel all orders and wait the beginning of the next session.
- If the entry order has been executed, the trader should move the stop loss 10 pips above or below the current price, depending on whether we are in a long or short position.
Another option for this strategy could be to close the position at 14:00 and take profits. However, in this way we could lose a good opportunity for profit, although if we allow the trade to continue there are more chances that the price reaches the Stop Loss. At the end we must consider that the reward we could get allowing the trade to continue compensates these small losses.
Trading system example: Operation in the GBP/USD
In the following example an Inside Bar was detected at 6:00 am GMT. Once we identify the Inside Bar, we can use a 1 hour chart to mark more accurately the levels where we will place the entry order and the stop order, although this is optional and we can continue to use the 8 hours chart without any problem. However, in this example the trader continued to trade with the 1 hour chart as it was more comfortable for him.
Subsequently, both the maximum and minimum of the Inside Bar are marked and then we determine the direction of the trade. Because the previous bar is clearly bearish (in this case we use the 8 previous bars of 1 hour which represent a period of 8 hours), we place a sell order 10 pips below the minimum of the Inside Bar, ie 1.9758 . Then we place a stop loss of 5 pips above the maximum, ie 1.9796. In this case the sell order is executed and the market starts moving in the direction of our trade.
Finally, at 14:00 GMT we put a stop loss order at 1.9668 which is reached in less than two hours. This gives us a gain of 90 pips. Also we could have put the stop a little higher to allow the operation to continue.