Undoubtedly, Price Action Trading is one of the sure-shot ways to accurately speculate stock market movements. It is a scientific and proven technique that relies on some specific chart patterns in conjunction with supply-demand to predict stock prices. And when it comes to price action trading, Master Candle is a lesser-known but very powerful pattern used by professional traders.
In this post, we are going to learn in detail about the master candle with practical examples and usage.
What is Master Candle?
In simple terms, a master candle is one tall candle that engulfs the subsequent 4 candles in the chart. That means the high of a master candle is higher than the high of the next 4 candles, and the low of master candle is lower than the low of the next 4 candles.
See the below example:
MC denotes a master candle that completely engulfs the 4 child candles C1, C2, C3, and C4.
Significance of Master Candle
Master candle signifies a point in time where the price falls into a tight range and both bulls and bears are struggling to move out of this range.
The 4 child candles following the master candles represent the state of dilemma between bulls and bears. You may also choose to look at only 3 child candles and ignore the 4th one.
As the market is largely driven by crowd psychology, master candle truly symbolizes this crowd behavior and their struggle to move prices up and down.
Also Read: Price Action Trading for Dummies
Master Candle Interpretation and Trading Strategies
The most common way to interpret master candle is to trade its breakout.
Master candle is generally a 5 candle setup, a mother candle, and the 4 child candles that are inside the mother candle range.
If any subsequent candle outside this 5 candle sequence breaks above or below the mother candle, then it signifies that either bulls or bears have taken over and the one-sided movement may continue for some time.
See the below examples:
So, the trick is to place buy order when price breaks out above master candle high, and place short order when price breaks out below master candle low.
It’s better to check only 3-4 candles after master candle setup for a breakout because anything beyond that may invalidate the whole setup.
Stops and Target
Stops should be placed at master candle high or low depending on the trade you took. For example: if you go long based on the breakout of the master candle high, then the stop should be placed at master candle low. In case the master candle range is too high, you should place stop loss at the lowest low of child candles
The ideal target should be equal to the size of master candle. For example: if you enter at price 100, and the size of master candle (High-Low) is 10, then your profit target should be 110.
Master candle trading strategy works great both in Intraday and EOD timeframe. In intraday, 30 min or above is better. Lower timeframes like 5 min or 1 min may be too noisy.
Master Candle AFL Exploration Code
Please use the below link to download an exploration code which signals master candle breakouts:
Master candle is indeed a great setup and we have been using it successfully for years. The accuracy of master candle breakout generally ranges between 30-50% but the risk-reward ratio is too good. So in the long term, if you consistently follow master candle based strategy, you’ll be profitable for sure.
Please feel free to share your thoughts in the comments section.