The third touch (also known as the third strike) trading strategy is another strategy that we are going to introduce to our traders. Unlike complicated strategies with the usage of many indicators, the “third touch” requires only one element – a trend line.
- You can implement the strategy on all of the trading instruments, including stocks and commodities.
- It is not recommended to use this strategy on the timeframes, which are smaller than M30. The smaller the timeframe, the lower the possibility of a good signal because of the price noise.
Let’s consider the steps that you need to follow. At first, let’s look at the scenario when you want to open a long position.
- You see the upward movement and draw the trend line, which connects two lowest points. These points ideally should be the extremums. This is the most difficult part of the strategy.
- We wait for the correction to the downside and enter the market after the price touches the trendline for the third time and the bullish candlestick is formed. We open a long position at the closing price of this bullish candlestick.
- We place a stop loss below the previous support level.
- Our take profit level is calculated as follows: The highest level after the “A” point – the lowest level at the “A” point = the number of pips you need to add to your entry level.
We will use the EUR/USD chart with M30 timeframe as an example.
On March 11, the pair started to move up. We waited for the point “B” to draw the ascending trendline. After that, we waited for the third touch at the point “C” and opened a position on the closing price of the bullish candlestick at 1.1292. We place the stop loss level at 1.1265 (lower than the previous support). Our take profit equals the size between point A (1.1221) and the highest point after point A (1.1272). Thus, we place it at 1.1343 (the entry point + (1.1272-1.1221).
For the short position, you need to follow the following steps.
- When the downward movement appears, you draw a trendline between two highest points.
- After the second of the trendline, we need to wait for the correction to the upside. Next, we wait for the price to touch the trendline for the third time. The short position needs to be opened at the closing price of the bearish candlestick formed after the third touch.
- We place a stop loss above the previous resistance level
- Our take profit level is calculated as follows: The highest level at the “A” point – the lowest level after the “A” point = the number of pips you need to deduct from your entry level.
On February 14, the EUR/USD pair bounced from the 1.2434 level and corrected to the downside. After the short-term correction, the price jumped to the upside but failed to move higher than the point “B”. The situation helped us to suggest about the possible downtrend’s formation. We waited for the point “C” to confirm our thoughts and entered a short position after the bearish candlestick was formed. The entry was placed at the closing price of the candlestick at 1.2405. Our stop loss was set above the previous resistance at 1.2421. Take profit was calculated as the entry point minus the distance between the “A” point and the lowest point after “A”: 1.2405- (1.2434-1.2387) = 1.2358.
In this article, we explained an easy-to-use strategy for trend traders. Its advantage is that it requires only trendline and the support and resistance levels. However, you need to be careful while trading the pairs and be sure that there are no events which may affect the movement of a trend.