A 60-period Simple Moving Average of the HIGHS -
- A 60-period Simple Moving Average of the LOWS -
- A 240-period Simple Moving Average of the HIGHS -
- A 240-period Simple Moving Average of the LOWS.
Your chart should now look like this
(if it doesn’t then go through the above steps again! )
The first thing to note is that we
trade with the current trend. We use the MAs (moving averages) to
help us with that. If the red MAs (60) are above the blue MAs (240) –
then we only look to take long positions. If the red MAs are below
the blue MAs – then we only look to take short positions.
Now, it’s not quite as clear-cut as
that, so we have to add a couple of extra rules to this:
#1 – All four MAs should be angled in
the same direction as the trade direction. In other words, if the red
MAs are above the blue MAs, the angles of all the MAs should be
upwards – like this:
The above rule is the same for short
trades – when the red MAs are below the blue MAs, we also was them
all to be angled downwards too!
#2 – It is fine for the red MAs to
”overlap” the blue MAs – in other words, only one red MA needs
to be above both the blue MAs for a long trade (or only one red MA
needs to be below both blue MAs for a short trade). In fact, it’s
better to look at the two red MAs together as a single “tunnel”;
and look at both the blue MAs together as a single “tunnel”.
Here’s an example of what I mean:
So you can see in the above chart that
in the inner-box the pair of red MAs are below the pair of blue MAs
(well, they are overlapping a little, but you can see what I mean,
right?). Okay, so now you know the direction in which we trade and
when. We take long entries when the red MA pairs are above the blue
MA pairs (and vice-versa for short entries).
Entry… Okay, so we’re about a third
of the way there (I told you it would be easy! ) – now the
specific entry. So, assuming we have the 60 (red) MAs above the 240
(blue) MAs, we’re looking for long entries. We get a long entry
when price crosses back down into the 60 MAs (the two red ones) and
the first candle closes above the UPPER 60 MA. Here’s an example:
You can also see in the above chart
where we place our stoploss – it’s always below the low of the
pullback for a long (or above the high of the pullback for a short).
Let’s take a look at a short entry
example:
Exits… I don’t put a huge amount of
emphasis on the exits. Why? Simply because as long as I stick to the
same exit method (whichever it is) – I get consistent returns and I
don’t worry about missing profits or start going down the “if
only…” path. Here’s what I do and I find it is a nice balance
for me (it’s not anything special – but it works!): I just take
profit at 1.5:1. In other words I take profit at 1.5 times the
initial number of pips I risked. So for example, if I risked 100 pips
initially on a trade – I’d take profit at 150 pips. Now if the
market continues on and reaches 300 pips or more, that’s fine, we
have to just accept that – it’s the way of trading. Just stick to
the same take-profit and it will work out!
Using our previous trade examples for
the entries we’ll look at them again in terms of take-profit. The
long example from earlier:
The short trade example from earlier:
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