In this post I will share the system’s rules and then post an example in a following post.
I want to point out that the picture I shared in the opening post is an important one; price does trend in that way. Its just that mentors have never helped us trade that movement properly. This is what this system will do.
Step 1: Plot the 20 Exponential moving average (ema), the 50 ema and the stochastic oscillator.
Step 2: Wait for the 20 ema to cross over or below the 50 ema. Now any moving average system tells you when (the 20 crosses above 50 goes long. when 20 crosses below 50 go short.) THIS IS WRONG! [B]The 20 ema crossing above the 50 ema indicates a very strong upward move that is about to correct soon.[/B]
The 20 ema crossing below the 50 ema indicats a strong bearish move that is about to retrace. So how do we know when does the retracement end and when will it continue? This is where the stochastic kicks in.
Step 3: If the 20 ema crossed above the 50, the stochastic will be OVERBOUGHT (indicating that a fall in price is near. If 20 ema crosses below the 50 ema, the stochastic will be oversold. This is the pattern I’m sharing with you; stochastic will be overbought with an upward cross over and vice versa on all trading instruments on all higher timeframes.
Step 4: Keep a close eye on stochastic, wait for it to go all the way to the other extreme. Place your entry when stochastic crosses over in the other direction.
ex: 20 ema crosses above 50 ema. Stochastic will be overbought (80+). Wait for stochastic to become oversold. when stochastic crosses up at oversold, by the next candle open.
It may sound confusing, but bear with me and things will become clearer in the example. All we did is traded the picture I shared in the first post. Price went from a low point to a high point (so 20 ema crossed above 50 ema.) price then retraced (stochastic went from overbought to oversold.) We entered when stochastic crossed over from oversold because we anticipate that price will go on to make a higher now. [B]This is the most profitable trading pattern you will encounter.[/B]
I use trailing stops. Once we enter. I draw a fibonacci extension from the low point to the high point if its a buy signal or from the high to the low if its a sell signal. I use the following levels: 1, 1.272, 1.618, 2, 2.618, 3, 3.618, 4, 4.618, 5… and so on.
When price closes above 1, I move stops to break even. When it closes above 1.272, my stop becomes a close below 1. Then when it closes above 1.618, my stop is a close below 1.272. A close above 2, sees me moving my stop to a close below 1.618 and so on.
In the next post I’ll share a number of examples to clear it up.