Candlestick Range Theory is the simplest trading theory in which we trade the higher timeframe candlestick on a lower timeframe using the concepts of accumulation, manipulation, distribution, and price range.
In trading, price always follows repetitive patterns. For example, first, the market will accumulate, then after price manipulation, the market will enter the distribution phase. This pattern was given by Wyckoff, a well-known stock trader.
However, this same concept has been used in the CRT Model, and it’s a more simplified version that is easy to trade.
In this post, I will explain the CRT trading model in detail, so make sure to read the full post and don’t skip any steps.
Understanding the Candlestick Range
Before learning the Candlestick Range Theory, a trader must understand the psychology behind the candlestick.
A candlestick consists of high, low, open, and close values. However, when you switch to a lower timeframe, you will see an entire world within a single candlestick.
For example, if you are looking at a daily timeframe candlestick, switch to a lower timeframe like 15M. On the daily timeframe, you will only get the high, low, open, and close values. However, on the 15M timeframe, you will see accumulation, manipulation, and distribution—all within one candlestick.
This information shows that every higher timeframe candlestick has a complete price range on a lower timeframe.
Universal Truths
There are some universal truths that you must keep in mind while trading.
One universal truth is that price always breaks the high or low of the candlestick. A maximum of two to three inside bars can form. However, price will always have to break the previous candlestick’s high or low to progress further.
So, we understand that price will always break the high or low of the previous candlestick, and we will treat the previous candlestick’s high and low as key levels for entry or trade exits.
What is PO3 or Power of 3 in Trading?
According to the ICT method, price always moves in a cycle of accumulation, manipulation, and distribution. We call these three scenarios the Power of 3 in trading.
Check the image below for a better understanding of this pattern.
Let me also explain the psychology behind accumulation, manipulation, and distribution in trading.
1. Accumulation
This is the price phase where big banks and market makers are buying or accumulating assets quietly without informing others. In this phase, price will move sideways and within a range, as if preparing for something big.
2. Manipulation
This is the price phase where market makers take liquidity from retail traders to make big moves. Price will form broadening formations and break highs and lows to eliminate retail traders.
3. Distribution
This is the phase where big trends form. Market makers will sell off their assets to retail traders and make profits. Big trends develop during this phase.
As retail traders, our focus is to identify the price range, avoid trading during the market manipulation phase, and then trade with the trend during the distribution phase.
What is Candlestick Range Theory?
Candlestick range theory is a combination of three candlesticks, where each candlestick represents the PO3 price phases.
- The first candlestick represents a price range. You can also assume it as an accumulation price phase. The high and low of the first candlestick will act as the price range high and low.
- The second candlestick acts as a manipulation candlestick. It will falsely break the previous range and then close inside the previous candlestick range.
- The third candlestick acts as a distribution phase candlestick that will break the range of the first candlestick in the opposite direction of the manipulation phase.
Look at the image below for a better understanding of this candlestick range theory.
Multiple Candlesticks in Each Phase
Previously, I explained that for candlestick range, you need to identify three candlesticks for accumulation, manipulation, and distribution. However, when you go a bit deeper into the topic, you will realize that a single price phase can consist of multiple candlesticks.
For example, let’s assume the price has formed a candlestick, and we marked it as the first candlestick. Now, the market can form multiple candlesticks within that range, and it may take more time during the manipulation phase. Instead of one manipulation candlestick, the market can create multiple candlesticks, as shown in the image below.
Similarly, the market can form multiple candlesticks during the distribution phase. This is a bit more advanced level of candlestick range theory.
How to Trade the Candlestick Range Theory?
To trade the CRT model, we will also add the confluences of order blocks, change of character, breaker blocks, and break of structure.
Below are the steps to follow:
- Identify a higher timeframe candlestick and mark the high and low by drawing an extended horizontal line.
- Switch to the lower timeframe and look for a false breakout of the range.
- After the false breakout, look for the formation of order blocks and a change of character on the chart because these patterns will confirm the trend reversal in the market.
- Open a trade from order blocks and place a stop loss below the order block.
- Add multiple take profit levels to diversify the risk. The first take profit should be at 50% of the first candlestick’s range on the higher timeframe, and the second take profit level should be at the range high/low.
This is the simplest but a powerful trading strategy.
The Bottom Line
In conclusion, I highly recommend all traders to use the concept of the CRT model. It does not matter what strategy you are following. For example, if you are using a supply and demand trading strategy, you can still apply the CRT model. Supply and demand help to find pinpoint entries in trading, and if we use the CRT model with this, we can capture high risk-reward trades with high accuracy.
I hope you are now able to understand the candlestick range theory in detail.
If you have any questions related to the CRT model or supply and demand trading, don’t forget to comment below.
Thanks!