The best strategies are easily explained, simple to implement and hard to get wrong, with that being said could you describe yours? Putting into words what you do is powerful and always exposes gaps for improvement.
At TrendTheMarket, we have created an effective system based on simple tools that we hope anyone will be able to understand to improve their trading. Moving Averages, Candles and Price Structure tells a story that when understood can help you to read the markets like a book.
What Do We Want The Algorithm To Do?
An Algorithm is a set of rules, created with mathematical calculations to solve a problem or perform a task. The first problem that we are trying to solve is how to limit losses, protecting wealth should always be your first priority.
The lowest risk entry into any market would be at the low of a strong bullish day that breaks out of a recent high. The high, once broken could act as a support level and add additional protection to our entry and stop loss from being hit. Nobody can predict the future but using tools and a set of trading principles, we can find when this setup might likely occur.
What Type Of Day Should It Look For?
Chasing a driving market increases the chances of being caught in a reversal. Markets have big days but they don’t generally have progressively higher and higher closing days. If we are wanting a strong bullish day tomorrow with the prospect of continuation days thereafter, we’d need tomorrow to be the initial drive. For that to be true, today needs to be a bearish day with the opening price being the break out point and support for future days. Its counterintuitive but the first thing we want to look for to enter any market is a bad day.
What Type Of Conditions Should It Find?
If selling today was balanced with buyers absorbing the supply, a narrow range day would occur. It might seem overly optimistic expecting a strong move in price tomorrow, but the probabilities begin to increase when you understand the psychology of the individuals trapped in their positions.
A Buyer: Went long today expecting a continuation of yesterdays strong move. They chased price, entered with a market order and have had a negative account balance for 24hrs. Fear set in because the market didn’t do what they expected and they move their stop loss closer to the current price.
A Seller: Went short today trying to predict a full reversal and it seems like they might be correct. They haven’t hit their take profit order yet but move their stop loss to break even, just incase the market decides to turn.
Neither individual has realised a profit and the last 24hrs has had them locked in and exposed to an unpredictable trading range. The range now has stop loss orders tight at both the day’s high and the day’s low making it easy for them to be hit. New orders will also start pending from break out traders who want to get involved, increasing the liquidity pools.
We Want Our Algorithm To Find These!
What we have described is the definition of an inside day in a strong market. The lowest risk entry to look for with the potential for the greatest asymmetric Risk:Reward. A coiled spring of human emotions dominated by fear, greed and hope that will react strongly when released. Its no surprise to learn that the Inside Bar candlestick pattern is one of the most powerful chart setups that professional traders look for.
This is the foundation of our Algorithm, a simple two candle formation which when understood can highlight optimum opportunities for market entries.
Where Do We Want The Algorithm To Look?
We subscribe to the methods of Richard D. Wyckoff and his theories of market cycles. All traders will have heard that they should trade with the trend, but understanding if there is one and where you are within the cycle is not always easy. For our strategy we need to be aware of key phases; Accumulation, Markup/Markdown & Distribution.
Money can be made in any market at any time, it depends on the strategy and trading plan being followed. Our strategy is to limit our time exposed to Accumulation ranges, enter the market at the start of a Markup Phase and have locked in some profits by the Distribution Phase. From a 100% increase in price it should be acknowledged that you would benefit from 50% of it.
How To Find A Markup Phase.
To be in a trend is very subjective, two different traders can be on opposing sides of the market and still both be right depending on their timeframes. When performing Technical Analysis on a chart, a break of price structure which leads to Higher Highs & Higher Lows is considered the criteria for defining an up trend. To be able to perform that analysis on all markets everyday is not feasible.
This is why whenever we refer to a trending market we are being very specific. We deem any positive move within the Daily, 20 Period, Simple Moving Average (20SMA) to be a trend, it is also referred to as a positive slope. With global traders observing the same markets trending in different directions, we will always refer to it as our Trend Phase. It cannot be disputed because it is specific and measurable.
All Opportunities Are Not Equal.
We’ve now established what we want to find and where we want to find them, the next step is to figure out where they are in relation to recent price. Our HiSpots (High probability areas in the market for trend continuation) are graded as Green, Amber & Red.
Green HiSpots
Occur in our trend phase and above the average price, in a position which benefits from the early trend but offset with lower potential reward due to already being extended above the range.
Amber HiSpots
Occur in our trend phase and below the average price, in a value position following consolidation or possible retracement, but offset with increased potential reward due to having more upside before encountering recent highs.
Red HiSpots
Major trends start with a significant momentum shift, a rejection of a price level that changes sentiment. Being outside of our trend phase they can occur anytime in the market and are deemed our highest risk, however the potential rewards are the greatest.
NOTE: Our HiSpot opportunities are only valid for 24Hrs, the measure of their success is to take out the previous days open, anything longer than that is unknown. They could just as easily initiate a strong multi week bull run or simply roll over as a False Breakout Reversal. Ensure that any trades that are being considered have profits locked in or at least be at break even during the first day.
Algorithm Results.
Referring back to the problem and questions that we attempt to answer will confirm that you understand our methods.
How do we protect our capital?
Our Algorithm reduces risk by locating probability setups of trend continuation.
Where is the next opportunity?
Our Algorithm saves you time by finding new trending markets.
Where do I get in?
Our Algorithm spots high probability areas to consider trading.
Final Words.
You should now have an understanding of what we do and how we do it. We give you the market, the bias & the best days to plan a trade. No strategy is perfect, its all about making sure there is an increased probability of the market closing higher. We have shown in detail what we try to find, the hard work involved is removing any low quality results by applying extra filters. Again, its not by using an array of complex indicators but by asking simple questions.
Is the market in trend?
Is the trend new?
Is the trend advancing?
Is the trend strong?
Is the trend extended?
Are recent price moves normal?
Is there momentum?
Is there demand?
Is there value?
We are not a signal service and will never advise on when to buy or sell which we believe are very personal decisions. We also wouldn’t enter a trade blindly on a HiSpot opportunity; Entry Rules, Risk Management and Exit Criteria on lower timeframes is what makes profit. Now that we will be saving you time, you can reinvest it in yourself to develop your own rules and plan your next trade.