The Basic 1-2-3 Setup

There are no right or wrong ways to trade, I have known as many different approaches as I have known traders.  I have known multi millionaires that average, yes average! The cardinal sin of trading. I have known people make money picking tops and bottoms and I have known successful trend followers. Personally I fall into the latter camp. My view of the markets is it is like a river and flows where there is least resistance, it isn't always fast and violent, but eventually this force will cause a gradual shift in one direction or another. It doesn't move in a straight line either, it ebbs and flows. Which can make timing your entry with a sensible stop loss hard to judge. This simple setup is a fantastic way, in my opinion, of having a simple set of rules so you take advantage of the market.

Firstly, make sure you are in a trending market. A simple moving average cross over will suffice. But make sure you ALWAYS use the same moving averages. Multiple trends exist simultaneously, if one day you use a 3/20 cross over, the next a 6/18 cross over you are comparing apples, to well.. anything that isn't an apple. The 3/20 MA may be in an uptrend, the 6/18 may be in a down trend, which is right? They both are of course, just keep the same benchmark.

Secondly, once you have found a trending market according to your criteria look for this setup. You are looking for a pull back in an existing trend and then you are looking to enter the trade when the trend resumes. The reason you are waiting for a pull back as it gives you a very favorable risk reward scenario.

See the following example;

This pattern will appear in nearly all strong trends. The best signals are usually the one that form straight after the moving averages cross over. They tend to become less reliable the more times they occur in one trend.

This outlines the entry and the stop loss. As for when to take profit I am against having 100% mechanical systems, the markets are always evolving and adapting. If we are in a choppy condition I may take profit when we approach another strong level of resistance. If there are a lot of fundamental factors supporting a trend I will trail a stop below subsequent market pull backs. There are no holy grails, only edges, and this pattern has proven a profitable edge for me.

This approach works on most time frames, but I prefer to use on a slightly longer time frame, i.e over an hour. The minute by minute stuff I find is best suited to playing for reversals of the trend as it is naturally quite choppy.