Three-Candle Rules for Daily Candlestick Trading

Summary

The document explains how to plot daily candlestick charts and describes a simple rule-based strategy using the previous three candles to decide whether to trade long or short on the fourth day. It outlines plotting market data for an example equity ETF, then gives separate entry conditions for each direction. Both setups require the most recent candle’s body to exceed the prior two; the second candle’s color and the relative closes determine the direction. Trades open at the start of the fourth day and close before its end.

The method is presented as an introductory pattern exercise, not as a tested or validated strategy. The article supplies no performance results, transaction-cost analysis, or risk controls, and gives no evidence that the rules predict returns. It suggests that traders may relax one close comparison in some cases, while describing the full set of conditions as more conservative. Stops, position sizing, and market-specific testing are not specified.

Key ideas

• The setup uses three completed daily candles to generate a directional signal for the next day.
• The largest recent candle body is a required condition for both long and short entries.
• The second candle’s color and the comparison of two closing prices distinguish the trade direction.
• Positions are opened at the next session’s start and closed before that session ends.
• The article offers no backtest results or defined risk-management rules.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.