Full Review of the 4 Candles Strategy – Advanced breakout Strategy
This advanced strategy uses candlesticks and only one other indicator for identifying breakouts and helping us avoid false ones. The creator of this strategy is a Forex trader named James, I found his strategy on forex-strategies-revealed.com. He states that this method of analyzing breakouts can be used on any currency pair and that it helps to have a good understanding of drawing support and resistance lines. Therefore, I suggest that only advanced traders try this strategy. Despite the fact that this is a Forex strategy, my first impression is that this can definitely work for binary options traders so let’s take a look!
How does the 4 Candles Strategy Work?
The 4 Candles Strategy requires candlestick charts set on the hourly time frame. In MetaTrader 4, go to Insert, indicators, Oscillators and add Stochastic Oscillator with standard settings (5, 3, 3). Set the overbought limit to 80 and oversold limit to 20. Once your chart is set, it’s time to move on to drawing support resistance lines, two of them. On the hourly chart, locate the first 4 candles of the current day. The first candle out of the four candles is always the one that starts on the 00:00 time on MetaTrader (that’s 24:00) if you are trading forex. In other words, this is 4 hours into a new market day that has begun, on the hourly chart.
Hover your mouse on each of the 4 candles to find out which candle has reached the lowest and the highest point respectively. Proceed with drawing two lines on your chart based on the lowest price and the highest price touched by these 4 candles only, notice that candle wicks do count! From this moment on, it’s waiting time. You need to observe your charts (or simply set an alert) so that when one candle touches one of your lines (upper or lower) you are ready to analyze the charts.
The soon as one of the horizontal lines are touched, you must check the Stochastic Oscillator for confirmation. If the upper line is being touched by a candle, then the stochastic must be going in the same direction (up) and not be overbought. When a candle is touching the lower line, stochastic needs to be going down and not be oversold. If these rules apply you can scroll down to the M15 time frame and look to confirm that a 15 minute candle closes above/below one of your lines, the signal to enter.
Notice that when the lower line is crossed stochastic is only halfway down and is going in the same direction as the candles, down! From here, we move to the M15 and when the first 15 minute candle closes below this line, we enter a put option.
Call Option: When an hourly candle touches your upper line on the hourly time frame and the stochastic isn’t overbought you scroll down to the M15 time frame and wait for a candle to close above the line. The close of this M15 candle is your entry!
Put Option: When a candle touches your lower line on the hourly time frame and the stochastic isn’t oversold you scroll down to the M15 time frame and wait for a candle to close below the line. The close of this M15 candle is your entry!
Expiries are not discussed since this is a Forex strategy but a suggestion is to give your trades at least an hour.
Why does the 4 Candles Strategy Suck?
This strategy sucks for beginners who don’t have candlestick knowledge and can’t draw decent support and resistance lines. Another issue is that we have no idea about expiries and whether it performs as well on higher or lower time frames! It also might suck for one glaring reason, what if the first four candles of the day have already been passed? What do you do then? Wait for the next day?
Why doesn’t the 4 Candles Strategy Suck?
I think this strategy is awesome for several reasons! One, it requires analysis of the chart with the help of candlesticks and doesn’t just rely on indicators. Two, it uses only one indicator which is the Stochastic Oscillator, a powerful and reliable tool. Three, it verifies breakouts and keeps you in the direction of the trend using more than one time frame. Four, you have a good chance of avoiding the false breakouts and thus, minimize your losses.
Conclusion – 4 Candles Strategy, 4 Good Reasons to use it!
Perhaps you already agree with me that this is a good strategy, even though setting a correct expiry is difficult. The analysis are quite simple for an advanced trader but still reliable. And since we only use one indicator it’s not going to be a mess if you wish to add another one. James, the author suggests, pivot levels and Fibonacci indicators/analysis are good complements. I gave you four good reasons for why this strategy rules, maybe the use of 4 candles isn’t the only reason for why it’s called the “4 Candles Strategy”?