If you’re looking for a simple yet powerful approach to enter trades in the high-risk world of forex, the Third Touch Strategy could be exactly what you need. This method helps you enter the market precisely at points where the probability of a trend reversal is significantly higher. As a result, you can identify more reliable entry levels and manage your risk more effectively.
If you want to learn how to trade like professional traders, don’t miss the rest of this article.
- The third touch of a trendline is considered the most reliable entry point, as it reflects market consensus and confirms the trendline's strength.
- When trading with the third-touch trendline strategy, always place your stop-loss beyond the trendline to avoid being stopped out by short-term market noise.
- Combining the third touch with price action signals or indicators such as RSI and MACD significantly increases the validity of your entry signal.
What Is the Third Touch Strategy?
One of the most popular strategies among professional traders is the Third Touch Trendline Strategy. The core idea of this method is built on the validity of trendlines. According to technical analysis principles, when the price reacts twice to a line, a trendline has been established.
However, what truly strengthens the credibility of that line is when price interacts with it a third time. In trendline trading, the third touch is considered the most reliable signal for entering a trade.
In this strategy, traders wait for the price to test a support or resistance level at least twice. On the third touch, the probability of a strong market reaction increases significantly, because more traders recognize the line as valid and place their orders around it. This collective behavior makes the trendline play a much stronger role in guiding price action at the third touch.
The Third Touch Strategy can be combined with other tools, such as candlestick patterns (Pin Bar, Engulfing) or technical indicators, to enhance the reliability of trade entries further.
Why Is the Third Touch the Most Reliable Entry Point?
In technical analysis, a trendline only gains significance after the price has reacted to it at least twice. However, its reliability is not truly confirmed until the market tests the trendline for the third time. It is at this third touch that the concept of the “third-touch confirmation” emerges as one of the most reliable entry signals for traders.
The primary reason for this reliability stems from collective market behavior. The first two touches are often seen as trial reactions, where traders are still unsure whether the level is genuinely significant. But when the price reacts again on the third touch, a market consensus forms among buyers and sellers. This collective recognition dramatically increases the probability of a reversal at that point compared to the earlier touches.
From a market psychology perspective, the third touch indicates that institutional investors and large market participants also acknowledge the level and have placed substantial orders around that area. This influx of volume amplifies the signal’s strength, creating ideal conditions for entering a trade.
The Third Touch Trendline Strategy is based on the principle that on the third touch, the trendline acts as a strong support or resistance level, and entering a trade in the same direction offers a much higher probability of success.
Principles of Drawing a Trendline for the Third Touch Strategy
For the Third Touch Trendline Strategy to work effectively, the trader must draw the trendline with precision and in accordance with proper technical rules. Any mistake in plotting the trendline can result in false signals and high-risk entries. Therefore, before applying the third touch strategy, it is essential to understand how to draw both uptrend and downtrend lines correctly.
How to Properly Draw an Uptrend Line
An uptrend line is formed when the market is moving in a general upward direction and price lows (higher lows) are created one after another, each above the previous low. To draw a valid uptrend line:
- Identify two key swing lows. The second low must be higher than the first, and both should occur within a clear bullish move.
- Connect the first low to the second low. The resulting line should have a positive slope that reflects the natural upward movement of the price.
- Ensure the line does not cut through candlestick bodies. It may pass through the shadows, but the bodies should remain intact to preserve accuracy.
How to Properly Draw a Downtrend Line
A downtrend line is applied when the market is moving in a bearish direction and price highs (lower highs) are consistently forming below the previous highs. To draw a valid downtrend line:
- Identify two key swing highs. These highs must be formed within a clear downward trend, with the second high lower than the first.
- Connect the first high to the second high. The line should have a negative slope that aligns with the overall market direction.
- Ensure the line does not cut through candlestick bodies. It may intersect with shadows, but it should never pass through the candle bodies.
In the Third Touch Trendline Strategy, the spacing between price touches on the trendline is highly significant and should not be too close together. Two touches that occur in proximity are generally considered as a single touch.
How to Enter a Trade Using the Third Touch Strategy
According to WalletInvestor, in the Third Touch Trendline Strategy, a trader should wait for the price to reach the trendline for the third time and then enter the trade only after observing a confirmation signal, such as the formation of a Pin Bar or a Doji candlestick.
This confirmation suggests that the market has responded strongly to the trendline, indicating a high probability that the trend will continue in the same direction.
How to Set Stop-Loss and Take-Profit in the Third Touch Strategy
In any strategy, the stop-loss must always be placed at a level where, if triggered, it clearly invalidates your trading idea. Similarly, the take-profit should be set in proportion to the level of risk you are taking.
In the following sections, we will explore in detail how to determine both stop-loss and take-profit when applying the Third Touch Trendline Strategy.
The Best Placement for a Stop-Loss
In the Third Touch Trendline Strategy, the most effective spot for a stop-loss is placed just beyond the trendline. This placement means that if the trendline is ascending, the stop-loss should be set slightly below it, and if the trendline is descending, the stop-loss should be positioned slightly above it. This approach ensures that minor market noise or short-term fluctuations do not prematurely trigger your stop. Instead, the stop-loss is only activated in the event of a genuine trendline breakout, thereby preserving the validity of the trading setup.
Setting a Logical Take-Profit Based on Risk-to-Reward Ratio
The risk-to-reward ratio (R/R) is the cornerstone of the Third Touch Trendline Strategy. Most professional traders adopt a risk-to-reward (R/R) ratio of 1:2 or 1:3 as a benchmark. In practice, if you risk 20 pips, your profit target should be set at a minimum of 40 to 60 pips.
A standard and logical method of setting profit targets is to use the next significant support or resistance level as your take-profit zone. Using this method ensures that your exit point is both technically sound and aligned with your predefined risk management rules.
Trade Management After Entry
Trade management is a critical component of the Third Touch Trendline Strategy. After entering a position, you can apply the following methods to manage the trade effectively:
- Break-even adjustment: Once the price moves in your favor by an amount equal to your initial risk, shift the stop-loss to the entry point. Moving the stop-loss to break-even makes the trade risk-free.
- Partial exit: Close a portion of your position at the first target and leave the remainder open to capture additional profit if the trend continues.
- Trailing stop: Use a moving stop-loss placed at newly formed highs or lows. This technique enables you to lock in profits while allowing the trade to extend further.
Such flexible management ensures that even if the market reverses before reaching your primary target, you can still secure profits or, at the very least, end the trade without a loss.
Advantages and Disadvantages of the Third Touch Strategy
Like any other trading approach, the Third Touch Trendline Strategy has its own strengths and weaknesses. Being aware of these can help traders make better-informed decisions.
Advantages of the Third Touch Strategy
- High probability of success: A trendline that has been touched and confirmed three times carries stronger validity. Therefore, entering on the third touch is often considered a higher-probability trade signal.
- Simple risk management: The stop-loss level is clearly defined—place it slightly beyond the trendline.
- Adaptability across timeframes: This strategy works well in both short-term setups (scalping and day trading) and longer-term contexts (swing trading or position trading).
- Compatibility with other tools: The third touch can be combined with candlestick patterns and technical indicators to enhance the reliability of the signal.
Disadvantages of the Third Touch Strategy
- Risk of trendline failure: No trendline lasts forever. The trendline may break precisely on the third touch, leaving the trader with an unexpected loss.
- Precision required in drawing trendlines: If the trendline is not drawn accurately, the signals generated will lack reliability.
- Market condition dependency: This strategy performs better in strong trending markets. In ranging or highly volatile markets, the likelihood of false signals increases.
- Fake breakout risk: Sometimes the market briefly breaks the trendline to capture liquidity before reversing. Such moves can prematurely stop traders out before the main move begins.
| Advantages | Disadvantages |
|---|---|
| High probability of success due to the trendline being confirmed three times | Possibility of trendline failure precisely on the third touch |
| Simple risk management with a clearly defined stop-loss | Requires high precision in drawing the trendline correctly |
| Applicable across all timeframes (short-term and long-term) | Dependent on strong trending markets; less effective in ranging conditions |
| Can be combined with other tools such as candlestick patterns, RSI, MACD, etc. | Risk of fakeouts (false breakouts) leading to premature stop-outs |
Trading the Third Touch Strategy with Price Action Confirmation
In the Third Touch Trendline Strategy, the trader waits for the price to react to the trendline (either ascending or descending) for the third time. This point, due to repeated confirmation of the trendline by the market, becomes a high-probability zone for entering a trade. If price action patterns such as Pin Bar, Engulfing, or Doji appear at the same level as the entry signal, the validity of the entry signal is significantly strengthened.
Trading Third Touch Strategy with the MACD Confirmation
The MACD indicator not only reflects the strength of the trend but also reveals shifts in momentum. This feature is exactly what traders need at the third touch: confirmation that the trendline remains valid and that price movement is likely to reverse or continue from that point.
How to use MACD with the Third Touch Strategy
- Draw the trendline and wait for the price to touch it three times.
- At the third touch, check the MACD as follows:
- In an uptrend: If the MACD histogram turns positive or the MACD line crosses above the signal line, the entry is given greater validity.
- In a downtrend: If the MACD histogram turns negative or the MACD line crosses below the signal line, the likelihood of continued bearish momentum is reinforced.
Trading Third Touch Strategy with the RSI Indicator Confirmation
The Relative Strength Index (RSI) is an indicator used to measure the strength and speed of price movements. When the price touches the trendline for the third time, RSI can serve as a confirming filter. Put:
- If the trendline is ascending and the RSI is near the oversold zone (below 30), the likelihood of a positive reaction and the start of a bullish move increases significantly.
- If the trendline is descending and RSI is near the overbought zone (70 or above), the probability of a continued downtrend and further price decline is reinforced.
- An RSI crossover above the 50 level signals strengthening buyer momentum and a higher chance of trend continuation to the upside.
- An RSI crossover below the 50 level indicates growing selling pressure and confirmation of a bearish trend.
Conclusion
The Third Touch Trendline Strategy is one of the most effective methods for identifying reliable entry points in the market. By relying on actual price behavior and market reactions, this strategy helps traders execute more precise and lower-risk trades. However, it is essential to remember that no method is flawless; therefore, combining this strategy with proper risk management and complementary tools, such as indicators, can significantly increase your chances of success.
