After finishing the first part of Adam’s book, I have decided to build my own set of rules for trading pullbacks. I have applied these rules (more or less) and I have managed to break even after an 8% loss in last few months. The rules are following:
- Always trade with trend on higher timeframe (consecutive HHs and HLs for uptrend, LHs, LLs for downtrend). Also check the slope of Keltner Channels (20EMA) and check ADX indicator.
- Do not trade if trend leg count is over 3 because the trend could be exhausted. Also, check the daily timeframe for signs of exhaustion (whole candles outside Keltner Channels).
- Beware of shadows on candles. They could indicate strong rejection against the trend.
- Avoid trades near very strong S/R levels
- A long setup occurs after sharp momentum (price goes through the upper Keltner Channel)
- A short setup occurs after sharp momentum (price goes through the lower Keltner Channel)
- Look for strong sign of price rejection in the direction of the overall trend (engulfing bar or pin bar)
- Ideally H1 chart should show exhaustion
Buy order example
Daily: HHs and HLs form an uptrend. ADX indicator also shows the uptrend.
H4: Look for an engulfing bar or a bar with large wick (e.g. pinbar) which shows strong rejection in the direction of the trend. A bar should form around the 20EMA:
Stop-loss is a few pips below previous pivot point. Target price is 2-3R (based on previous important levels). After the price gets to 1R, part of the position is closed (30-50%) and stop loss moved closer to the entry point (or near the 50EMA) to break even or have a smaller loss.
H1: Ideally, the price should show signs of the overextension on an hourly timeframe:
Sell order example
Daily: LHs and LLs form a downtrend. ADX indicator also shows the downtrend. Slope of Keltner Channels also show strong downtrend:
H4: Engulfing bar showing strength of sellers. A bar is formed around 20EMA:
H1: The price shows signs of exhaustion on an hourly timeframe:
This set of rules is a combination of mechanical trading system and discretionary trading. In next few months I will be able to see how it works out. I will post my trades on this blog on a weekly basis.