Second candle: Small, can be a doji or an inverted hammer, indicates weakening buying pressure.
- Third candle: Bearish (closes below the open), partially overlaps the body of the first candle and indicates the beginning of a downward movement.
Entry into the trade:
- Enter at the open of the next candle after the close of the third bearish candle.
- Stop-loss: Set slightly above the high of the second candle (or the last local high).
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Signal confirmation:
- Volume: On the third candle, volume should increase, confirming the trend reversal.
- Additional indicators: RSI or MACD can be used to confirm divergence or overbought/oversold conditions.
- Support/resistance levels: Reversals often occur near key levels.
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Example of the strategy in action:
1. In a down market:
- The first candle shows strong selling pressure.
- The second candle is small, forming near support.
- The third candle breaks upward, demonstrating buyer strength.
- Entry into a long position at the open of the next candle.
2. In an up market:
- The first candle is a strong bullish candle.
- The second candle indicates a slowdown.