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The Red-White-Red strategy

Description

The candlestick pattern, which is the core of the Red-White-Red (RWR) strategy, consists of a red, a white and a red candle. Red-white-red are also the colours of the Austrian national flag. No coincidence … the trader who designed and uses this strategy is Austrian. Patterns tend to be a visualization of market psychology. The psychology behind the RWR pattern can be condensed as follows: weakness followed by a 1-day rebound, followed by one day of hesitation, followed, hopefully, by a market rise.

The following is typical for the Red-White-Red strategy:

  1. A unique chart pattern based on candlesticks visualizing market psychology.
  2. Interesting rules for managing the open position.
  3. Only long positions are taken.
  4. Red-White-Red is available as a pattern, a signal and a strategy.

The strategy can be used for swing trading on all instruments.

 

Suitable for : Market indices (DAX, DOW ...)
: Forex (EUR/USD ...)
: Commodities (oil, gold ...)
: Stocks
Instruments : Futures, CFDs, forex and stocks
Trading type : Swing trading
Using NanoTrader : Manual or (semi-)automated
 

The strategy in detail

An example of a Red-White-Red pattern.

Candlestick patterns for traders
 

To have an RWR candlestick pattern the following three criteria must be met in a day chart.

  1. The candles must have the colours and sequence as illustrated above.
  2. The low of candle 1 > the low of candle 2 (the first red).
  3. The low of candle 2 and the low of candle 4 > the low of candle 3.

When all the criteria are met, the platform will colour the background of the chart, behind the pattern, gold.

 

Three possibilities

The NanoTrader offers pattern recognition, trading signals and trading strategies.

  • Automatic recognition of patterns is possible in both NanoTrader Free and Full.
  • Trading signals are given by NanoTrader Full.  As a signal a position can, be opened automatically. The trader can add is own stop(s), target(s) etc. and manage his position the way he wants.
  • Trading strategies are mostly available in NanoTrader Full. As a strategy the position can be opened and closed manually or (semi-)automatically. The trader can follow the strategy as is or modify it.
 

When to open a position?

A long position is bought at the market price, when an RWR pattern occurs and the market moves above the high of the second red candle. This price level is indicated by a horizontal green line.

 

When to close a position?

The open position is managed by a profit target and a stop loss. Both the profit target and the stop loss can change during the life span of the open position. These changes happen according to specific rules.

The profit target follows these rules:

  1. The target is 2x the risk. (A return/risk ratio of 2).
  2. If, after 6 days, the position is still open, the target is lowered to the high of the previous day.

The stop follows these rules:

  1. The stop is set to the low of the white candle in the RWR pattern.
  2. If, after 2 days, the position is not making a profit, the position is closed at the market price.
  3. If, after 3 days, the position is still open, the stop is increased to the break-even level. The trader can no longer make a loss.

To quote the trader who designed the Red-White-Red strategy: “The exit rules underline how important it is to quickly get a handle on the risk of an open position.”

This example shows a typical RWR pattern: weakness, sudden 1-day strength, a day of hesitation, and a market rise. This position reaches the target the day after it has been opened.

Free trading strategy Red-White-Red


This example shows a trade on the FTSE 100 index. The position is profitable after two days; therefore, it has not been closed at the market price. After three days the position is still open and the stop loss order was automatically increased to the break-even level. The position reaches the profit target.

Trading strategy closes position with profit


 

Practical implementation

Using the NanoTrader follow these steps:

  • Select the instrument you want to trade and open the chart.
  • Select the RWR pattern, the signal or the strategy in their respective folders.
  • Set the time frame of the chart and select an aggregation for the channel.
  • If required, adapt any parameters as described above.
  • For semi-automated trading, activate TradeGuard+AutoOrder in the chart. For automated trading, activate AutoOrder in the chart.