[B]Philosophy[/B]
I keep hearing that “the trend is your friend” so I decided to come up with a system that would allow me jump in a trade based on the general direction of the price movement.
I’ll be combining a trend-following indicator (moving averages) with an oscillator (Stochastic) for confirmation. On top of that, I’ll be adding filters in order to avoid fakeouts.
[B]Things you need[/B]
[ul]
[li]4-Hour Chart of the EUR/USD
[/li][li]20 EMA applied to the close
[/li][li]10 EMA applied to the close
[/li][li]Slow Stochastics with parameters 14, 3, 3
[/li][/ul]
[B]Entry[/B]
Basically, I will use the two EMA’s (10 and 20) on the 4-hour chart to determine when to buy or sell. I’ll also include a couple of filters to avoid getting faked out. Who wants to get faked out anyway? Getting faked out in a trade is just as bad as getting “flaked out” on a date. But that’s another story, for another time…
Anyway, the idea is to open two long positions whenever the following conditions are fulfilled: the fast 10 EMA (blue) crosses over the 20 EMA (red) from under and stochastics is in between 50 and 80. In order to avoid whipsaws and get additional confirmation, I’ll set my orders 30 pips above the previous crossover candle’s high (roughly 25% the pair’s Average Daily Range).
Some clarifications:
[ul]
[li]After the 10 EMA crosses the 20 EMA, check whether Stochastic is overdone or not
[/li][li]If Stochastic is not yet overbought or oversold, set an order 30-pips above or below the cross-over candle
[/li][li]Close the open order if it doesn’t get triggered when the candle after the crossover candle closes
[/li][/ul]
Here are some examples:
Going short is just the doing everything the opposite way. This means I will open two short positions 30 pips below the previous crossover candle’s low whenever the 10 EMA (blue) crosses over the 20 EMA (red) from above and stochastics is between 20 and 50.
[B]Short Entry[/B]
[B]Exit[/B]
Profit targets are simple. I set my first profit target equal to the Average Daily Range of the pair, which is roughly around 150 pips for the EURUSD pair. Once that is hit, I will put a 150 pip trailing stop on my second position to ride the wave and create a risk-free trade.
Of course, I know that I won’t be hitting my target all the time as trends sometimes reverse. Because of this, I will also exit my trade manually when another cross over occurs.
My stop loss points would be set 10 pips above / below the low / high of the candle [B]BEFORE[/B] the crossover candle. If that happens, I believe my trade idea is invalidated. My stop cannot exceed 150 pips. Below are examples of where I would put my stop loss orders.
[B]Long Entry Stop Loss[/B]
[B]Short Entry Stop Loss[/B]
[B]Risk Management[/B]
I will never risk more than 1% of my trading account on a single trade. I will adjust my position size depending on my stop loss.
