Don't Make Simple Trading Strategies Complicated
One thought that many traders consistently obsess over is how to create simple trading strategies that offer the lowest risk and the highest reward. I can relate to this because I used to go through this type of thought process myself several years ago.
I always thought about ways to minimize my risk and increase my profit potential and it's not something that's always easy to do. One day by pure chance, I stumbled on a trading pattern that allowed me to enter the market with very low risk while maintaining the ability to profit substantially. What I liked best about this method was the strong momentum that follows after the entry signal is triggered. This strategy works with stocks, futures, commodities and Forex in case you trade any of these markets.
This strategy is very easy to find on OHLC chart and I'm sure after this tutorial you will have no problem finding several examples yourself. The first thing you need is a strong trend going either up or down. Anyone who follows my tutorials or enrolled in the courses knows I'm a big proponent of going with the current market trend.
You can see in this example how the stock in this example is trending strongly. You want to make sure you find good trending markets so that your odds avoiding getting stopped out are substantially decreased and your profit potential is substantially increased.
Once you identify the trend you have to identify the actual set up. The 2X inside day is a cone shape pattern that has two inside days inside of each other. I developed this set up to find days within a trend when the market slows down substantially and takes a breather from volatility. This offers me the opportunity to enter during a quiet period before volatility picks up once again.
I also consider the fact that no lower lows were made and price action was able to maintain inside the previous low demonstrates continuing strength may be ahead. You can see in this example how each day's high and low are inside the previous day's trading range. This is the type of set up you want to find when trading the 2X Inside Day set up.
You can get a closer look of the pattern in this example. Notice how each succeeding day is inside the previous one. The trading action gets very tight which lowers your risk level substantially when you enter set ups with low volatility such as this one? The entry is $05 cents above the price high that was made on day three and your stop loss level is place $0.10 below the third day's low price. The entry signal must be triggered on the fourth day. If your buy stop does not get triggered on the fourth day you must cancel your order and the trade is nullified.
Once the entry stop is triggered you should always immediately place a stop loss order below day three low. The profit target for this strategy is set to 4 times your risk level. In this particular case the risk was only $0.55 cents, so the profit target would be $2.20 added to your entry price. You can see the entire sequence from entry to exit in this example. Trades with risk of less than $1.00 that have 4 times profit potential are considered very low risk trading opportunities and this is what the 2X Inside Day Strategy offers.
The 2X Strategy works equally well to the downside as it does to the upside. You can see in this example how the stock broke the uptrend and is developing a good down trend. This is a good example of the type of trading action you want to see before the trade set up. The beginning of a trend is a great place to enter because momentum usually increases as trends continue moving in the same direction.
Once you establish that the market or stock your trading is in a downtrend, you need to isolate the set up. In this case you would once again look for 2 days that are below the high price of the previous day and above the low price of the previous day. Once you see the set up a few times you will start noticing it over and over again when you scan charts for your daily hit list. You can see in this example exactly what the set up looks like.
Once you identify and isolate the set up you can place your sell stop entry order $0.05 cents below the low made on day three and once you get filled you should place your stop loss(buy stop) order $0.15 cents above the high that was reached on day three. This example demonstrates exactly where the protective stop loss and the entry sell stop levels go.
You can see the entire sequence on a daily chart which may give you a slightly different perspective on the set up and the entire trade sequence. The key to this strategy is isolating patterns where your risk is extremely limited such as these two examples I provided for you today. The risk for each of these two examples was less than $1.00. This is a great risk for a trade that can yield anywhere from $2.00 to $4.00 in profit.
Next time I will demonstrate more inside day strategies so you can take advantage of low risk entry opportunities. For more on this topic, please go to: Does Day Trading Work and Day Trading With Short Term Price Patterns
All the best,
By Roger Scott