A 5-minute candlestick strategy to collect midnight profits

For those of us with limited time for screen-watching, shorter-term candlestick trading can be frustrating, as we wait around for patterns to form.

So, instead of waiting for candles, this simple candlestick strategy looks at one crucial candle – the first one as Japanese markets reopen … and uses that to trigger overnight profits.

This is also a great way to limber up your price-action muscles, testing how good you are at spotting bullish and bearish candles. Practise this in demo mode, while you build your skills, and you’ll soon find your profits building.

Here are the rules to my 5-minute Candlestick Strategy …

• Just after midnight, open up a 5 minute chart on the Japan 225 index. We’re interested in that first 5 minute candle.
• As soon as that candle is formed, we’re going to make a ‘bullish/bearish’ judgement call based on the shape of that candlestick. (More on this in a moment.)
• Next, we’ll mark the mid-point of this candle (including wicks) – this will be our entry point. If it’s bullish, this is where we’ll place an order to buy. If it’s bearish, this is where we’ll place an order to sell.
• The stop level is placed just beyond the wick of the candle (by a couple of points), and the profit target is just within the wick of the candle (by a couple of points).
• The following morning we’ll close out our order if it hasn’t yet been triggered.

Here’s an example …

Our key candle is the first 5-minute bar after midnight.

In this example, the price has gapped up, and quickly filled that gap within that first 5 minutes. I make a judgement call that this is a bearish candle, so set an order to sell if the price hits the half-way point, with my target at the base of the candle, and my stop level at the top of the candle.

Once the order is set, I can leave it to run overnight. And, within half an hour, the order is triggered, and the profit is taken.

Extending profits

I the example shown above, the opening gap is already filled by that first bar. However, this is often not the case, and we may have an opportunity to make extra profits if we’re trading in the right direction, and there’s a gap to fill.

In this next example, the price has gapped down on the open, forming a large green (bullish) candlestick. Instead of taking profits at the top of this candle, I’m going to look to extend those profits by ‘filling’ that gap …

A gap will not always give us an opportunity for extended profits. This only applies if we’re trading in the direction of the gap. In the example below, the market has gapped down, but my judgement on the opening candle is bearish, so there are only a few points profit available in this case …

Bear in mind, where the profit opportunities are tight, like this, that Japan is not a cheap market to trade, so I’d avoid taking any trade that offers less than a 20-point profit.

So how do we judge ‘bearish’ and ‘bullish’ candlesticks?

You could devote many years to the study of candlestick patterns and their nuances. But here I want to give you an at-a-glance way to spot bullish or bearish sentiment in a single candlestick.

We’re interested in body size and wick size. So, here are some key points to bear in mind …

• A long upper wick tells us that sellers have come into the market and driven the price down. This is a bearish signal as the sellers have outnumbered the buyers at this price level.
• A long lower wick tells us that buyers have come into the market and driven the price up. This is a bullish signal as the buyers have outnumbered the sellers at this price level.
• A large green candle with little or no wicks is a bullish sign, showing buyers in control.
• A large red candle with little or no wicks is a bearish sign, showing sellers in control.
• Small bodies and long wicks tell us there is indecision in the market, but if the wicks are similar lengths, there is no indication of whether this is bullish or bearish.

So, the general things we’re looking for in our opening candle are a long wick above or below …

Or large, decisive candles …

If the candle isn’t giving a clear message, or you’re unsure, they just sit out that night – there’s no reason to risk your cash unless you’re confident that you have a signal.

This same method can be used to trade other opening gaps, but watch out for trading costs on your instrument, and how they compare to the size of the gain you’re getting.

I look forward to hearing how you get on.

Regards

Mark

P.S. Don’t forget that you can download the classic ‘Trader’s Bulletin Candlestick Cheatsheet’ here.

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