The Double Red Strategy
If you use the double red strategy, you are using a system that looks for short term reversals in price. These reversals are signaled by both price action and resistance. When two bearish candles form after a test of a resistance level, then a strategy may be used. You can see what we mean in the chart below:
- Pick an asset that you want to follow. Watch the market and chart until you see the first red bar. Now wait for a second red bar to appear.
- If the second red bar closes lower than the first red bar you spotted, then you’ve found the pattern!
- What will then usually follow is that a third red bar will appear. This third bar will go even lower than the second bar. When this happens, it is time to place a put option on the asset.
Other Key Points
- This example is modeled with a 5 minute chart and an option expiry time of 5 – 15 minutes.
- Beware! This strategy is not best suited to volatile markets.
- Do not use this strategy when big news events are taking place. These events can disrupt the trend.
The Pinocchio Strategy
Remember the children’s character Pinocchio? His nose would grow much larger than his small body if he told a lie.
That is what you are looking for with this strategy: a small body, and a long shadow (nose). Other names for this pattern are: the shooting star, the hanging man, the hammer or the inverted hammer.
When the shadow (nose) is longer than the body that is an indication of a “lie” in the market. It signals that a trader should trade the opposite way to the direction of the shadow.
Other Key Points
- Time frame to analyze: 1 hour – 4 hours
- Expiry time to use: 5 minutes – 15 minutes
- Do not be tempted to use the 60 second expiry time for your options if using this strategy!
- Do no trade in a neutral (directionless) market if using this strategy. For a true Pinocchio signal, an uptrend must form. Trying to execute this strategy in a neutral market increases your risk a long way.
For Advanced Traders
- The entry point that you begin your trade with will vary. Some traders would rather be patient and wait for a withdrawal / retracement to the 50% Fibonacci level of the Pinocchio bar.
- Other traders are happy to enter their trade as soon as the Pinocchio bar closes. A longer “wick” or upper shadow will indicate that selling pressure from the market is very strong. On the other hand, a long “tail” or lower shadow suggests strong buying power.
The 1-2-3 Forex Trading Strategy
After an time when a commodity or currency moves up strongly, you can start looking for the 1-2-3 forex trading strategy.
- First of all, mark the top of the first strong move up with a “1”.
- Once you have seen a counter move, or a move in the opposite direction, mark the bottom of that move with a “2”.
- Now, if the next new move up does not go past where you have marked “1” and starts turning down once again, mark the highest point of this new move up with a “3”.
- The pattern is now complete. But you must be aware of a very important rule: the price must move down to “break” the low created at point “2”. If that happens, then you can execute the trade by placing a “put” option.
Other Key Points
- For this pattern, use an expiry time that is the same as the time frame of the chart you are using to identify the pattern.
- Two is better than one – it is safer to open two trades with shorter expiry times for this strategy, rather than one longer term trade.