Many trading strategies involve complex and thorough analysis, which makes them not applicable for scalping because full assessment of the market situation takes a lot of time.
It may happen that during the time when a trader makes market analysis, situation can change completely; therefore the trade, which was considered profitable 5 minutes ago is not relevant any more. There are also strategies when a trader has to make trading decisions within a few seconds on the basis of the minimal factors. Free Candle strategy is one of such strategies and we will talk about it in this article.
Indicators and search of entry points
In Free Candle strategy we use only one indicator, which is available in any trading platform- it is exponential moving average or EMA. In the indicator settings we choose the figure 9, which means that market analysis will be conducted on the last 9 candles. The price will hardly ever go beyond this indicator, but the rare moments when it does go beyond, are the moments of opening positions.
As the name of this strategy indicates we need to search for a «free candle» on the chart paying attention to two following requirements:
- Closed candle should be at the large distance from the moving average; neither its shadow nor the body of the candle should touch the indicator.
- Closing price of the candle should be more or less than the closing price of the previous candle. That is, if a new candle, which can be considered as the free one, closes below the moving average, its closing price should be lower than the price of the previous candle and vice versa.
In order to determine closing price of a candle a trader shall put a cursor on it; the data relating to this candle will be shown in the pop-up window.
Once a free candle is found, a trader can open a position. Let’s view an example of placing a sell order on the chart:
We can see that a free candle complies with the requirements stated above. It means that the moment of opening the next candle is the moment of opening a sell position.
Buy position is opened when the candle closes above the moving average. So that neither its shadow nor a body will touch the moving average and closing price will be higher than the closing price of the previous candle.
Note that Free Candle strategy is designed specifically for scalping, its signals are not confirmed and weak, protective orders are placed very close to the price level in order to eliminate losses.
In the sell position above we place a stop-loss order at the highs of the last candle. In this case, protective order is placed three points beyond the opening price; however the price has moved in the desired direction and at the opening of the next open candle our protective order can be moved into the breakeven zone.
evelopers of this strategy recommend traders to use the following provisions for determining location of the Take-profit order: first of all it is necessary to calculate the size of the free candle. In our case, it is 4 points. Then we multiply this value by two, the result is added to the opening price.
In our situation, take profit order is only 8 points; but in case of strong market volatility, this value could be larger.