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A Simple “Buy” Strategy
Before you jump right into the trading world, you first need a plan, right? Right.
This is the best way to organize not just your thoughts, but most importantly your next steps, as well as note down different strategies to test over time.
But what elements do you need to prepare your trading plan?
Simple.
1. An “Entry” into the market (in this case, a Buy entry)
As we mentioned in our previous article, we buy in an uptrend and sell into a downtrend, because an uptrend is more likely to continue to move in the same direction than reverse.
Similarly, a downtrend is more likely to continue to decline lower and lower than reverse.
Now, what happens in the unfortunate event that the market reverses before we book any profits?
Simple. We lose money!
How much? Nobody knows. A little, a lot, or everything.
This does not sound very good now, does it?
Well, this is why you should always place a protective stop loss to avoid big losses.
2. Define the “take profit levels”
After choosing your preferred timeframe, an easy way to go about is the 1:2 ratio, and we can identify the trend with the help of the 100-period moving average.
The Buy entry will be determined by the 50-period moving average.
More precisely, we look for a downtrend as defined by at least two lower tops and two lower bottoms.
A tip here is that the prices will be below both moving averages and additionally both moving averages will be moving in parallel without crossing each other.
Now, we look for a price to break through above the shorter (ie 50-period) moving average.
Then, wait for the correction to the 50-period moving average.
When the moving averages cross, is a good opportunity to buy once the price exceeds the current top above the moving average.
3. Stop-loss & Taking Profit
A stop-loss should be added at the last bottom. And of course, taking profit is up to you.
So your 2 choices in this case are:
- Either close the trade when 1:2 or 1:3 risk to reward ratio or
- Close the trade when the price closes below the 50-period moving average.
Now you have a buy strategy!
