Step 1: Setting up the chart
Our chart is simple and even a fifth-grader can locate the buy and sell signals. Let’s set up our chart, as shown below, before moving ahead.
- Select the 5 minutes time frame
- Use either a candlestick chart or a bar chart according to your preference
- Plot 20 and 50-period exponential moving averages on the chart
That’s it, the chart is set in three simple steps and we are ready to move ahead.
Step 2: Identifying the trend
Every trader should learn that the ‘Trend is your friend’, early in the career. Any time you can utilize this principle as an edge in your trading, you should. It's often easy to lose focus of something as simple as watching out for the trend, so in this strategy we make sure we identify it before even thinking about making an entry.
- Price should be above both the 20 and 50 EMA.
- 20 EMA should be above 50 EMA
- Both 20 and 50 EMA should be curving upwards
- The moving averages should not crisscross each other frequently. 20 EMA should be comfortably above the 50 EMA.
- If all the above conditions are fulfilled, it confirms that the pair is in an uptrend and we can look for opportunities to go long on the pair.
- Price should be below the 20 and 50 EMA
- 20 EMA should be below the 50 EMA
- Both the moving averages should be turning down.
-The moving averages should not crisscross each other frequently. 20 EMA should be comfortably below the 50 EMA.
- If the above conditions are fulfilled, the pair is in a downtrend, and we can look for opportunities to short the pair.
Conditions for entry
- Price should be above both the 20 and 50 exponential moving averages.
- The 20 EMA should cross over the 50 EMA and the 20 EMA should be above the 50 EMA.
- Price should retrace back to the 20 or the 50 EMA, but should not break and close below the 50 EMA.
- If price breaks below the 50 EMA, we have to wait before price again moves above both the moving averages.
- We don’t do anything on the first pullback to the 20 or the 50 EMA.
- The second pullback to the 20 EMA should be purchased if it holds, which means, three 5-minute bars should not consecutively close below the 20 EMA.
Entry bars and stop loss placement
- After the moving averages cross over, we wait for the first successful retrace of the price.
- The first two instances are not successful as price breaks below the 50 EMA, hence, they are not considered (as marked on the chart).
- The next time, the retrace is till the 20 EMA and it holds. That confirms our uptrend is in motion and is strong. We want to buy the next retrace to the 20 EMA.
- We want to buy above the high of the bar, which makes a breakout from the 20 EMA. We get an opportunity and we buy once price breaks above the high by one tick, as shown in the chart.
- The stop is placed a tick below the recent lows, also shown in the chart.
- We wait for the price to move at least equal to our stop loss value to raise the stops to break even.
- Before price could reach higher, price again retraces back to the 20 EMA.
- We again buy one tick above the high of the bar, which breaks above the 20 EMA as marked on the chart and place the stop loss one tick below the latest low.
- Once price moves up equal to our initial risk, we raise stops to break even on both the trades.
-Continue trailing the Stop Loss one tick behind the 3rd candlestick or bar (meaning not behind the current bar or behind the bar to the left, but behind the next bar).
- With the trade set up this way, we are safe from risk but also have huge profit potential if the momentum continues to soar which is often the case in this setup
An example of a short trade is given below:
If you are looking for a simple strategy to take advantage of the current market conditions, this is a great one to consider. Though, as always, I recommend practicing on demo and feeling comfortable with it before risking live money.
It's simple and effective and can be mastered very quickly. Not only is it easy to spot your setups, but it keeps you in line with the prevailing trend and always has a tight stop loss so your risk is under control and your profit potential is high.