Here is the general plan I will be following:
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- There needs to be a trend!
- Look for both a rising/falling 20 and 100 period simple moving averages
- Identify strength of trend
- Steeper and longer slopes identify stronger trends
- I like to use the Guppy Multiple Moving Average also to identify trends and trend strength. Plot these EMA's:
Short Term (blue): 3,5,7,10,15
Longer Term (red): 30,35,40,50,60<o></o>
- The stronger the trend the smaller the retracement is usually<o></o>
- You don't necessarily have to know the exact strength of the trend because we will define a “minimum” retracement so that we can catch small dips as well as any bigger dips. This procedure will allow you to catch the ideal trades as well as those highly profitable trades that are less than ideal. The most important point to remember here is that if you demand too great a retracement you will be missing some of the best trades.
- Some examples of how you might identify a minimum retracement:
1. The low of the last 2 or 3 days has gone below a short term moving average, i.e. 7 period SMA<o></o>
2. The slope of a short term moving average has turned down
The ideal “retracement” is a very small pullback in a very strong trend. These set-ups allow for better entries as they have the lowest risk and the highest profit potential.
- Enter when the close is the highest close of the last 3 periods
- Enter on a higher close when the daily range has expanded. (Today's True range is greater than the 3 period ATR)
- Place a buy stop at last period’s high<o></o>
You are not trying to buy on the lows. What you want to see is some evidence that the correction is over and that the trend has resumed. This form of set-up along with our reliable identification of the underlying trend will give your trades a very high probability of success.<o></o>
If you are making sure that the short, intermediate and long term trends are all going in our favor you should expect to have your trades showing profits right from the start.
- Exit the long trade when the close is the lowest close of the last 3 days<o></o>
- Exit the short trade when the close is the highest close of the last 3 days<o></o>
- Trailing Stop, i.e. Chandelier Exit
- Scale out using profit targets. Trade usually initiated with 3 units. Method that Vegas uses for 1 hour Tunnel is a good example.
- Exit the long trade if the candle turns red and more than 75% of its body is below the upper Bollinger bands (20,1). <o></o>
- Exit the short trade if the candle turns blue and more than 75% of its body is above the lower Bollinger bands (20,1).