Updated on June, 12th, 2015
Master candles do not work anymore
Sorry to tell you this, but master candles do not work anymore. This post was originally written in late 2010, and Forex trading has changed since then.
How exactly has Forex changed? Well, check out this picture…
The chart above shows the average daily range of AUD/USD, for each year, since 2006. As you can see, in 2010, the average daily range was around 120 pips. These days, the average daily range is less than 100 pips.
This has not only happened on AUD/USD, all the Forex majors are moving much slower today. Since master candles rely on explosive breakouts, the drop in average daily ranges has made them impossible to trade.
So, what is the solution?
Trade price action reversals!
Now that average daily ranges have returned to 2006 levels, I have gone back to trading price action reversals. If you want to see how I trade reversals, check out my free price action strategy.
If you do not know much about reversal trading, here is a basic set up I took this week…
By combining support and resistance, with advanced candlestick analysis, I trade trend reversals. Not every trade works out as well as the one above. However, reversal trading does have a very high success rate.
How to learn price action
If you want to check out my free strategy in more detail, check out my recent free webinars. There is over five hours of webinars below, and they are all about advanced price action trading.
- Trading my price action strategy on past data
- How to place support and resistance areas
- My advanced price action strategy explained in three webinars
Hopefully you can adjust to Forex without master candles!
Below is the original article, I have kept it here for posterity…
2010 – Advanced Master Candles
Over the past few months my trading has been evolving. I have started looking away from simple S+R line trading and looking more at candles. Don’t get me wrong S+R lines still make up a big part of my trading but they have taken a back seat to candle patterns.
This is because I have been delving into price action analysis. This is the analysis of the movement of price as it is happening. The major benefits of price action analysis are:
- It isn’t lagging. You trade based on what is happening right this second.
- You can adapt to changing market conditions quickly.
- You can trade at pretty much any time.
The main forms of price action analysis I am using are reversal trading and master candles (MCs).
I am already doing a few videos on reversal trading. I released the first last Friday and will release another tomorrow. So I thought I would do a few posts on master candle trading. I will also start doing MC analysis for some of the main pairs daily.
Filtering Out Bad Master Candle Trades
This was contributed by forum users Samarkand, djcash, and Wombles.
Master candles tend to give a lot of false breaks especially on volatile JPY pairs such as g/j and e/j.
One thing you should look out for is Scouting Parties these are candles that break through the MC line, reverse, and close. Check out the example below.
Scouting Parties can cost you some serious pips. For this reason some traders do not enter on the first MC break. They wait for a Scouting Party to form and then place a limit order with a 5-10 pip buffer just beyond the bounds of the Scouting Party candle. This way they only enter the trade after the Scouting Party candle is broken.
As you see in the picture above. When the price broke the scouting party high it pushed through and it ended up being a +50 pip trade.
I will be doing a few more posts soon discussing some more awesome master candle techniques. As I said I will also be posting some master candle set-ups daily. So keep an eye out on the blog for master candle analysis.