This article describes a strategy, chiefly meant for traders who cannot spend a lot of time on trading. Hence, recommended timeframes are H4 and D1. The author recommends D1, and I completely agree with him. You will definitely have fewer signals, yet a daily candlestick accounts for all the events of the day, which means it is really weighted. On the other hand, H4 candlesticks even inside one day can be more or less informative - just compare a night candlestick with a one from the midst of a European trading session.
Anyway, the strategy is applicable to the charts of any instrument in Forex, futures, or stock market. So, if you have access to all the three markets, the D1 chart hardly influences the number of your entries, only trades will be, indeed, lengthier than on H4.
Desktop of Forex While You Work
Explanation of the desktop:
- a Simple Moving Average, period 200, drawn on Close prices;
- a Simple MA, period 200, drawn on Lows;
- an SMA (200), drawn on Highs;
- the CPIv1.5 indicator that marks bullish candlestick patterns by green arrows and bearish patterns - by red one, giving its pattern the correct name.
Signal to buy by the strategy
For such a signal to appear, the following must happen:
- The price chart must bounce off the MAs upwards, no matter where these lines are headed;
- At the breakaway or soon after it, a bullish candlestick pattern must form.
When all the conditions are there, place a pending order several points above (or several dozens pips above for 5-digit currencies or 3-digit form of USDJPY) the high of the signal candlestick plus spread.
An example of a signal to buy by the strategy:
This example shows a very clear signal of a bullish engulfing. The price chart contacts not only the upper MA but also the middle one, which is a perfect bounce. In essence, the target MA for a bounce is the one drawn on Close prices. However, as long as in such strategies there are always issues with bounces happening near the MA, there are two lines added to the strategy, marking the bounce area.
Signal to sell by the strategy
For such a signal to appear, the following conditions are necessary:
- The price chart must bounce off the MAs wherever they are aimed;
- At the bounce or right after it, a bearish candlestick pattern must form.
After all the conditions are met, place a pending order several points below (or several dozens pips below for 5-digit currencies or 3-digit USD/JPY) the low of the signal candlestick.
Example of a signal to sell by the strategy:
In this example, the signal appeared at the change of the trend. There is a clear correctional momentum downwards plus the signal candlestick closed below the consolidation level. Also, before the engulfing, a bearish pin-bar occurred, adding up to the signal to sell.
Stop Loss and Take Profit for Forex, futures, and stock markets
Stop Loss is placed in the goddess old way: under the signal line for buys and above the signal line for sales, if the extreme can become local. If the extreme is exceeding the previous one, use the nearest local extreme for placing your SL. When selling, keep in mind the spread.
Take Profit here is quite prudent: it is placed a bit lower than the last prominent high on the chart for buying and a bit lower than the nearest prominent bottom when selling. The potential profit-to-loss ratio should be under 1:1. No trailing or breakeven is provided.
Money management for the strategy
Risking the same percent of the latest deposit size in each trade is perfect for this strategy because it uses pending orders. Risk at a time must not exceed 1-2%. As long as price charts are quite large, trading the same size of lot is quite unwise.
Example of trading by the strategy
In this example, CPIv1.5 did not detect a candlestick combination, yet you can see by just your eye that there is a pin-bar and even the "right eye" confirming it and bringing the price out of the bounce area. As long as on the left, there is an obvious top, from which the price dropped to the MAs, the TP is placed a bit lower. Moreover, the top consists of several local highs, forming a clear resistance level. As for the Stop Loss, it can be brought to the breakeven after another local high was broken away. This is quite a decent option of trailing the position, described in detail in the Protective trading strategy rules.
To sum up, I would say that the strategy is really flexible. It can hardly be called a trading system because you need to apply your own analysis alongside indicators. I am sure that you will need time to master the strategy. However, when you trade on large TFs, especially on D1, you will have plenty of time for analysis.
By Dmitriy Gurkovskiy, Chief Analyst at RoboForex