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  • Friday, August 26, 2005

    Winning Trading Strategy

    I have briefly gone over this strategy yesterday on the TOL trade.Repetition is good for the mind.Unfortunately I missed a big part of the move for reasons of personal matters.Ok,the strategy consists of a 5 period simple moving average(5sma) and a 15 period exponential moving average(15 ema).The examples are of a short sell on NEW.If you click on the chart it should open a new window for easier reference back to the chart.Top of chart,there was the 1st entry signal when the 5 sma crossed down thru the 15 ema,I was able to scalp some of that move.Now as that crossover took place there is some space between the two averages which I refer to as a channel.Notice that price never penetrates back through the 5 sma and never even comes close to the 15 ema.Now there will be cases where price will trade back up to the 15 ema and generally that should be used as a stop out point.Use your own discretion on the stops,that will depend on your own risk tolerance,but as a rule of thumb you should use either a few pennies away from the 5 sma or the 15 ema as your stop price.

    There are a couple of triggers for entry on this trade.
    #1: The first crossover of the moving averages after sideways action(top of chart).
    #2: As price moves away from 5 sma it will eventually trade right into it.(Refer to the missed entry on the chart at 42.50.There was a small inside bar right before that.Another entry of this nature was the second bar up from that.)

    Now for the exit triggers.
    #1 Referring to the chart there was a large peak in volume on the third red bar from the missed entry.That would warrant taking half off for me.
    #2 There was a stochastics crossover to the upside on that candle followed by a stochastics move back up thru the 20 band.(On the chart this is where it says Stochastics exit signals with arrows.There are also two black horizontal lines,the top is the 80 band and the bottom is the 20 band.Rule of thumb is when the stochastics crosses up through the 20 band that is a buy signal,and when it crosses down through the 80 band that is a sell signal.(That's a whole different post in itself...)
    #3 If you waited you could have also exited on the first break back up through the 5 sma or the trade up to the 15 ema.
    #4 When the channel between the averages gets wider than your initial risk tolerance,it's time to take some or all of the position off. For example on the chart there was a huge volume peak,the distance between the next bar and the 15 ema was about .40 cents away. If your original stop was .10 or .15 then it's definately time to take some off.

    This example is based on the 5 minute chart.It can be used over several other time frames.(5 and 15 minute are the most common.)

    The entire move in this example was about 1.23.Not a bad trade if the rules are followed.This setup has been showing up a lot in several of my trades,therefore I will start trying to adhere to it more in the coming trading sessions.I will follow up with my results in the near future.....


    At 10:50 PM, Blogger Barc1169 said...

    I love this example. It has some sound Strategy at its core. Combining the SMA with an EMA adds to its efficiency because the SMA and EMA act differently in their calculations which allows for the "Channel" described herein to develop gradually and in my opinion more accurately than a channel formed by two EMAs or two SMAs. This allows for the development of a sound exit strategy. Kudos.

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    they tell everyone the thing that even a new trader knows but nobody will give u any good strategy.

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