Trading with the “Opposite Thirds Rule”

02/01/2010 11:06 am EST

Focus: STRATEGIES

I’m mainly a short-term forex trader, and over the years, I’ve worked on the following entry method that’s proven successful for me. It’s not perfect by any stretch, but test it out on your own to see if it might be a good fit for your style. I truly value the blog and hope that my article can give you some insight into my trading and hopefully it can help yours, so let’s dive right in.

First, a time frame must be established (daily; weekly; intraday, such as 60-minute chart). The long entry criteria for my trading plan is one close above the 72-period simple moving average (blue moving average line in chart below). This candle is called the signal candle.

The 72-period moving average must be above or have touched the 21-period moving average. When the market trades and closes above the 72-period moving average, it has a greater probability of continuing into that direction as the 72-period moving average is a much slower moving average and confirms that the trend has most likely changed and is moving into the new direction.

The candle must be a strong white candle where the open and the close for that trading session is in opposite thirds of the strong long bar. When determining if the candle is a long strong bar, you are comparing it to recent previous candles.

In the image below, you will notice the market fell down for three candles before having a strong white candle where the open and the close are on opposite thirds of the bar. The white candle is also quite long (strong) in comparison to the previous bars.

chart
Click to Enlarge

As soon as you observe that the market has fulfilled the above criteria (one daily close of a long, strong bar with the open and close in opposite thirds above the 72-period moving average and the two moving averages have crossed so that the 72-period moving average is temporarily above or they have touched), then you can go ahead and enter the next day “at market.”

Make sense? Ok, now onto the “Opposite Thirds Rule.”

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Opposite Thirds Rule

It is important that the candle has the open and the close in opposite thirds of the bar, and the three scenarios below will further explain why in more detail.

This image below shows a candle that has the open and the close in opposite thirds of the bar should you cut the bar into three equal pieces.

chart

Corresponding commentary for this image can be found below, and is assuming the daily time frame (daily candlestick chart):

chart
Click to Enlarge

Candle 1

Rule: One daily close above/below 72-period moving average

Yes: The black candle that is to the right of figure #1 has closed below the 72-period moving average, ready for a possible short trade.

Rule: Strong/long candle

Yes: It would be considered a strong candle in comparison to the previous candles as it has a range that is much larger than that of the previous candle

Rule: Candle open and close in opposite thirds of the bar

No: As you can see, the open is midway down on the bar, and therefore, there is no valid entry

Candle 2

Rule: One daily close above/below 72-period moving average

Yes: The white candle that is to the right of figure #2 has closed above the 72-period moving average, ready for a possible long trade

Rule: Strong/long candle

Yes: It would be considered a strong candle in comparison to the previous candles as it has a range that is much larger than that of the previous candle

Rule: Candle open and close in opposite thirds of the bar

No: As you can see, the open is midway up on the bar, and therefore, there is no valid entry

Candle 3

Rule: One daily close above/below 72-period moving average

Yes: The white candle that is to the left of figure #3 has closed above the 72-period moving average, ready for a possible long trade.

Yes: The 72-period moving average (blue) has crossed above the 21-period moving average (red)

Rule: Strong/long candle

Yes: It would be considered a strong candle in comparison to the previous candles as it has a range that is equal to or much larger than that of the previous candle

Rule: Candle open and close in opposite thirds of the bar

Yes: The open and the close are in opposite thirds of the bar, and therefore, this is a valid entry

Interestingly enough, this third rule saved the trader from entering into two losing trades. OK, now it’s time to take some of what I’ve shown you and apply it to your own charts before you actually trade it and see if it’s something that will work out for you!

Best of luck in these trying markets!

By Steven Lee Jones of Forex Profit Launcher

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