Powerful Trading Strategy
A great trading strategy that is easy to use and will greatly improve your consistency and results. This strategy uses some common indicators to keep you on the right side of the market. Trading the expansion phases of a trend gives you the highest probability of success and best risk to return ratio. Utilise our strategy and key indicators to stay on the right side of the market.
This momentum based strategy can be used for any market or timeframe.
Today we’ll talk about a powerful yet simple trading strategy that’s suitable for daily use. We will show you the basic concepts behind the strategy and how to utilise indicators within this strategy.
We’ll focus on being in the prime price zones to make sure we’re on the right side of the market. The strategy will help you to gain consistency in trading and significantly improve your strike rate.
The idea behind the strategy revolves around a few common technical indicators that help you get in the right zone and stay on the right side of the market to catch the market’s expansionary phase. Like in all trading strategies, sometimes the market won’t act as you’d expect, so make sure you have your risk management rules in place.
In the following setup examples, we will look at the Hang Seng index’s intraday price action on a one-minute chart. Hang Seng is a popular instrument for day traders as it consistently offers trading opportunities. In this strategy, we will show you how to capture some momentum moves.
The Strategy Breakdown
When testing the critical price levels, markets move between contraction phases and expansion phases. During your preparation before trading intraday, it’s important to define the key price levels and have your expectations in place of what the market might do around these key price areas.
Although we will use technical indicators such as MACD and Stochastic, the strategy’s core is still defined by the price action with the relation to the momentum change. We also use two Exponential Moving Averages (EMA) with periods of 20 and 50. When the EMA (20) is above EMA (50), we have bias up and want to look for long setups, and when EMA (20) is below EMA (50), we have bias down and are interested in short-sell setups.
We use MACD to support a momentum shift. Ideally, we want the MACD line and the signal line to come back and bounce off the zero and remain in the positive territory to trade the momentum up. Conversely, we want MACD to come back to zero from the negative territory and rebound down for short-sell setups.
We will focus on the histogram for confirmations to pinpoint the exact candles that we want to use for an entry. We will look at this rule in detail in the upcoming setup examples.
In the Stochastic, we’re looking for reversals up from the oversold area for long entries on a pullback and reversals down from overbought areas for short-sell trades.
If the conditions of EMAs, MACD and Stochastic are met, we will look for an entry trigger based on the price action. We’ll delve deeper into the price action triggers in the setup examples below.
Let’s look at two pullback setups, “1” and “2”. Around 12:05 PM, the market made a powerful move that caused EMA (20) to cross above EMA (50), thus activating long bias for further setups. Afterwards, the move tested the 29900 price level and pulled back.
As the market was moving down, forming a pullback, the conditions have aligned for the setup “1”: Stochastic was in the oversold territory (see the circled area in the Stochastic window), and MACD was descending towards zero. Ideally, we need two green bars in the MACD histogram to consider an entry. In the indicator window, the white square highlights two green bars for the setup “1” in the chart above.
Finally, the price action signal tells us to buy when the market breaks out above the several candles’ highs that are shown with the horizontal white line of the setup “1”. Although the market didn’t go far after the first setup, there is nothing wrong with the trade as long as the entry criteria are met.
The insignificant up-move after the first setup formed a lower high and turned into another pullback that we’re interested in catching. Notice, although the prices descended below EMAs, we can have a bullish bias as EMA (20) is still above EMA (50). Let’s look closer into the reasons for taking the long setup “2”.
Our other entry criteria match up again: Stochastic is oversold, MACD moved to zero, and its histogram show two green bars, and the price action formed another micro consolidation with a defined upper border (see the white horizontal line of the setup “2”). We buy when the price gets above the consolidation’s upper border and keep our stop-loss below the consolidation’s low.
Depending on your trade management after the entry, you could take some quick profits or even withstand the subsequent pullback and take advantage of the proceeding move.
As the price was recovering after the last pullback, the market offered another setup, this time of a different nature than the previous pullback setups. The market formed three pullbacks and the lower highs, culminating in the trendline’s breakout (see the white inclined line).
The setup “3” at its core is more of a breakout setup rather than pullback rebounds in case of the setups “1” and “2”. When we trade breakouts, we want to enter the market when the momentum is starting to accelerate, therefore out “two bars” signal from the MACD histogram is still valid. After MACD moved down to zero, it started to grow, providing us with two green bars and even the third one as a confirmation, as you can see in the white rectangle of the indicator window.
Regarding the Stochastic, it’s fine for the indicator to stay overbought (or oversold in case of a short-sell setup) when we trade breakouts.
As a price action signal, we want to see the price hold above the pattern boundary. In setup “3”, we buy when the candle closes above the trendline. In the chart above, the entry candle for the setup “3” is highlighted with a rectangle. Notice how the entry candle coincides with the third green bar of the MACD.
Forming lower highs, all of the short-term sellers that attempted to short the market most likely set their stop-losses above a last local high. Thus, when buyers manage to push through the trendline, the higher prices activate the short-sellers stop-losses, pushing the price higher and triggering more stop-losses. Eventually, we have a snowball of stop-losses accumulated as the market kept breaking new local highs, resulting in a momentum up.
A good spot for the stop-loss would be under the entry candle’s low or previous candle’s low.
Fade and flip!
After the market has broken out above the trendline, offering us some momentum, the price started to stall and consolidated. The market attempted to continue the up-move by breaking out from the consolidation but failed to hold above the pattern’s upper boundary (see the white horizontal line above 29900 in the illustration below) and formed a candle with a long upper wick indicating aggressive sales (see the circled candle of the setup “4”)
After the long wick candle, traders who attempted to take advantage of the brief consolidation breakout now experience losses and rush to close their long positions, causing the proceeding to decline.
Although by going short, we’re trading against the main trend, as EMA (20) is still above EMA (50), with the appropriate trailing stop tactics, it makes sense to expect some impulse down after the breakout failure. The purpose here is to fade the previous momentum up after the trendline breakout.
The indicators also confirm the validity of the short-sell setup “4”: the MACD bars are getting lower as the momentum cools down and the Stochastic stays in the overbought zone.
We can sell at one of the three horizontal white lines that signify the local lows’ breakdowns. The stop-loss can be above the consolidation’s upper boundary or a previous candle’s high before the entry candle.
The setup “4” offered a meaningful impulse down, which, when started to stall, offered us another long setup. If you were holding a short position by now, you would certainly exit and could consider flippng your position.
Here all of the criteria match our “standard” set: EMA (20) is above EMA (50), Stochastic is oversold, and the MACD offers three green bars as a confirmation of the momentum shift.
The price action gives us the final entry trigger as the market breaks above the five-minute consolidation boundary. We buy when the candle closes above the setup’s “5” white horizontal line. We can set a stop-loss below the previous candle’s low.
The strategy that we looked at in this article is fairly simple and can be applied in different markets. The approach attempts to capture a momentum shift as the market phase changes from the contraction to the expansion.
We use EMAs to get the general direction bias, MACD and Stochastic to confirm the momentum shift, and the price action triggers to pinpoint the exact entry and set the stop-loss.
Sometimes setups vary, allowing us to disregard one of the criteria depending on the context, like in the setups “3” and “4”. To get sufficient confidence for such discretionary flexibility, make sure you experienced enough “screen time” in trading.