Trading Pullbacks – My Rules

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:

  1. 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.
  2. 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).
  3. Beware of shadows on candles. They could indicate strong rejection against the trend.
  4. Avoid trades near very strong S/R levels
  5. A long setup occurs after sharp momentum (price goes through the upper Keltner Channel)
  6. A short setup occurs after sharp momentum (price goes through the lower Keltner Channel)
  7. Look for strong sign of price rejection in the direction of the overall trend (engulfing bar or pin bar)
  8. 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.

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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.

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