The Red Arrow Strategy

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Level: Intermediate
Tools needed: MT4 (Download) or an other Chart Provider like Tradingview.
Indicators needed: –
Chart Timeframe: 5 Min
Expiry: 20-30 Min
Best Session: London
Strategy relies on: Price Action, Engulfing Pattern,
Basic knowledge in Candlestick Theory needed.

From my other posts you know that I am yet in my training. I lost much money in the past with binary options because I lost my mind games often and was not yet a Zen trader. But I am in the training with the NERD and got always out of that addictive, senseless pattern I was jailed into. One of the first strategies I learned that helped me out of the downward circle of blowing one account after the other (see also “How to blow your account in one day”), was when I found a very well working strategy. OK – my long term goal is not finding a strategy that works and than just follow it, I really want to learn what is behind it and why this strategy actually works – but for now, it was my exit of ongoing loss and entry into mindful binary options trading. I recommend to use your Binary.com demo account and practice, practice, practice – once it clicked, head on to live account with 25$ deposit and use the Money Management by the NERD to grow your account, but back to topic!

The Red Arrow Strategy

The Red Arrow Strategy for binary options trading needs a basic knowledge about the Candlestick Theory, I am sure the NERD will bring up a tutorial on that soon.  Furthermore, you will need to have a chart provider / chart tool such as Metatrader 4 (desktop) or Tradingview (webbased). This strategy works best within the London market times between 7:00 AM GMT and 3:00 PM GMT on major volatile pairs like EURUSD.

A. The Preparation

These are the steps to start:

  1. Download MT4 or create an account on TradingView.com. In this tutorial we will use MT4.
  2. Start it and load the currency pair EURUSD.
  3. Choose the timeframe of 5 Minutes for the candlebars.tf5
  4. You should see now increasing and decreasing candle stick bars. You should see now something like this:eurusdbom5The lines above and below are called Bollinger Bands and come from an indicator named “BolliToucher”, you might not have it on your chart. Whilst it is crucial to know more about these Bands, they are not mandatory for this strategy, but can give you more confidence in your estimation of the whole situation, later once you know more. There will come a Bollinger Band article soon by the NERD, I am sure.
  5. Setup is done. Now wait and observe

B. What we need to know

We are searching for engulfing candles, so it might come handy to know what engulfing candles are and which kind of them we need, to make this strategy work. An engulfing pattern refers to a set of two candles, one bearish and one bullish. Whilst the body of the second of those two, must be bigger than from the first candle.
engulfingcandleOn the example on the left you can see, the second candle is way bigger than the one before. The second bullish candle engulfed the prior bearish candle. This example shows an bullish engulfing. Would it be versa vice and the bearish candle would be the bigger second one, we would call it bearish engulfing. In this case the bearish candle is engulfed by the following, so it is a bullish engulfing.

But we need a bit more to know to define a winning setup.  We need a so called TWEEZER pattern. This fancy schmanzy word describes, when the both candles are equal at top or bottom at their reversal.

twizzer

On the example to the right we have bearish engulfing. This shows two tweezers, they end equally at the top of the candle before the reversal has started. Don’t worry about the blue box, I just drew it to emphasize what I wanted to show. On a bullish engulfing, the red lines (I drew them as well for visualisation, they don’t appear automatically) would be on the bottom of the both candlesticks. Not only the bodies count for that, it can be as well when the body and the wick end at the same point, wick/wick or body and body like above – everything, it just has to end at the same point.

To have a really satisfying success rate, we need one factor more to be met for this strategy: we need not only a tweezer,  but we need also that the engulfed candlestick (the first of the both) has a LONGER WICK than its body. I repeat, the wick of the first of the two candles, must be LONGER than its body. Does my last pic above meet this criteria? I don’t believe so! So check the next example which is what we really search, like a truffel dog truffels:

truffle-203031_640

Oh, sorry I was confused, this is actually a truffle and not a candlestick, let me check my inventory and come up with a real screenshot of an ENGULFING TWEEZER SETUP WITH THE FIRST CANDLE HAVING STRICTLY LONGER WICKS, THEN ITS BODY:

setup

You see the following things:

  1. Engulfed and engulfing candle have their bodies on one line
  2. Engulfed candle has a wick that is longer than its body.

OK – so far so good, please note two things down until now:

  • This strategy is about engulfing candles, you have to learn to identify them
  • This strategy is about tweezers, engulfing candles that end /start equally before the reversal (with their bodies, body / wick or wick/wick).

C. How to find a good trade setup with THE RED ARROW STRATEGY and place the trade

Now we know already quite a bit, but we need to get the last missing puzzle piece to leave this whole not, well, puzzled. Where to enter the trade? That is now the question, we want clarify in this last chapter. Ok, let’s break this up in tiny chunks, as this always the best to learn. We stay with the last image from B. as setup.

  1. Select the trendline drawing tool on MT4
    trendline
  2. Draw an eight candles long line, starting from the engulfed candle. How to know the length you may ask now… That is actually easy: After having a line drawn, you double click the line and get into the edit mode. If you now stretch or decrease the line it shows a number on the right, the first equals the number of candles, so we want to look it like that here:
    drawtrendline
  3. Now we draw a line back.
    a) The engulfing candle is bearish like in the example? Then draw back to deepest point between the last 14 candles. So you go back to deepest point up to six candles from the starting point of the engulfed candle (6+8 = 14). You connect it – and TADA – you will have the RED ARROW.
    redarrow
    b) The engulfing candle is bullish? Then you draw back to the highest point within the last fourteen candles. In the bullish variant the straight line is on the downside of the arrow, so all versa vice to the bearish example above.
  4. Now in the example the trade is already done and the whole timeframe has gone through. If you do that live you obviously have not the next set of 4 candles already, but it works the same way. Once drawn back like described in point 3. you wait until the engulfing candle or one of the following candles violates the red line.
    violationHeck, YEAH! Directly the engulfing candle has violated the line, so we don’t have to wait for the future candles and can directly place the trade, once the next candle starts.
  5. Now, when the violating candles has closed and the next candle has started, we place the trade in the direction of the engulfing candle. If it is easier to recall: If the straight line sits on the top, we trade a PUT, if it sits on the bottom, we trade a CALL. In both cases with an expiry of 4-6 candles, which equals 20 to 30 minutes on our 5 minute timeframe chart. After the violation you really have to sit there and wait for the next candle to appear and place the trade immediately. thetrade

RULES FOR VALID SETUPS

  1. Until the entry candle appears the candles inside the arrow must not violate the horizontal line of the drawn error
  2. The markets should not be full of slow movements (many small doji candles for example).
  3. Just by experience: The engulfed candle should not be a very small dojis, there should be a visible body. The wicks must be bigger than the body.

And that’s it. Be aware that it needs some patience to find a setup. Don’t lose it just by the want of pushing a button. Sit it out an win. Be like me and experience the feeling to get the control back. You never want to trade blindly again and lose your hard earned money. Take the plunge and practice it in demo. Successful? Start it live then. I tested it for a whole week now and had a very good win rate here.  However, finding a strategy that you as noobie can understand and execute with success is not everything. As next step must follow that we need to learn why a strategy works. Which market mechanisms are behind this?

My Live Statistics for the RED ARROW strategy (Fresh start 02/13/17)

Wins: 1
Losses: 0

EGB/USD 02/13/17
Chart:
Trade:

du-du-du-di-du-dudel-dud-dud-dud (X-Files music)

Better safe then sorry!
For trading goes: better safe then sorry!
A bearish behaving car.
A bearish behaving car.
Example of a bullish breakout
Example for a bullish breakout
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