Contrary to popular trading beliefs, there are actually such things as perfect trade setups. The reason a lot of traders say perfect trade setups do not exist is because they rarely have the patience to wait for these perfect setups.
My definition of a perfect trade is a trade that has the following characteristics:
- It should be in the direction of the trend.
- It should have minimal risk and have a good risk-to-reward potential.
- It should also have momentum on its side.
My trading has evolved over time, and I have worked hard to find a setup whose rules suit my trading personality. Personally, I do not like waiting too long to take a trade, but I want relative certainty before I jump into the market. With this in mind, I developed my trading setup around the 15-minute trading chart.
The system is quite simple; it uses two moving averages and a Commodity Channel Index (CCI) all on the 15-minute trading chart.
- 20-day Exponential Moving average (EMA)
- 80-day Exponential Moving Average (EMA)
- CCI with a period of 336
Using this rather simple trading setup, it is very easy to spot some very high probability trades.
This is the underlying factor responsible for the success of any strategy; it must take positions in the direction of the trend. Trend-following strategies will always outperform counter-trend strategies, the reason is simply because the forex market is trendy in nature. Another thing to consider is the fact the the market is based on the actual performance of world economies, and economic booms or recessions tend to last for a relatively long period of time.
To determine the trend, I use the CCI indicator. Once price is above the zero mark, we only consider long positions. While, we consider short positions when the indicator is below the zero mark.
The moving averages are introduced to fine-tune the trading entries. When the moving averages cross up, with the CCI indicator above zero, it is a good signal to take long positions.
The second condition for taking high probability trades is that they should have as little exposure as possible. To achieve this using my setup, I do not take trades on the first cross of the two moving averages. Instead, I have to wait for the second cross in the trend direction. This means waiting for a correction of the trend before placing a trade.
Now, this is the hardest thing for any trader to do. Waiting for a second cross means watching over 200 pips go by and waiting for a whole week before taking any trading decision. There is also the probability that the market may not go up after that second cross.
Lets see what happens after the second cross:
Lets consider how this second cross helps us minimize our exposure:
By placing our stop loss just below the cross, it effectively reduces the distance we would have needed to allow for price oscillation.
Simply put, it helps us have a tighter stop loss price, while providing a huge profit potential.
Trade Supported by Momentum
A rational person trying to cross the road would wait till the traffic light turns red, indicating that vehicles on the road are expected to stop, so it is safe for pedestrians to cross. It is the same thing at a train crossing, as a sane human being you stop when a train is crossing the road for one simple, the train will crush you if you don’t. A train moving at 100 miles per hour (mph) will cause major havoc to any vehicle that is in its way, because it is bigger and faster.
This is also true about the forex market, the market will not hesitate to take your money if you take a counter-trend position in a market that is backed by high momentum. Rather than oppose market momentum, it is smarter to take positions that are supported by momentum.
The examples above are all from one hour charts, so even while trading the 15-minute charts it is necessary to keep an eye on the larger time frames to ensure that our trades are not going against price momentum.
A cool trick for gauging price momentum on any chart is watching out for the break of resistance and support levels. Trend lines are also an invaluable tool that can be used.
I can almost "hear" many skeptics arguing about how it is possible to throw some indicators unto a chart and find profitable entries after the fact. And I could agree with such arguments, because moving averages crossing over each other will always look good on any trending market chart.
So to throw more light on my setup, I will show its application during the contest month.
Some other trades:
My trading is definitely still a work in progress, but I think I am getting better.
The current account balance is about 246,000USD from twelve trades, and I am number 12 on the trader contest table.
I have also managed to keep the daily drawdown at 0%.
I would appreciate any observations and contributions about the trading setup, and I sincerely hope some one learnt a thing or two from this article.