I know this trading strategy sounds like a mouthful, but I think it explains what are the tools that we will be using to trade stocks.
Over the years I have discovered that the rising 20 MA can be a very powerful way to find excellent trading opportunities.
Before that I would like to deal with some of the common problems that many people who are new to the stock market faces:
You don't have a trading strategy
You don't have a trading strategy that is reliable
You don't have a trading strategy with good reward to risk ratio
You don't have a trading strategy that is easy to spot
You don't have a trading strategy that happens frequently
If you answer yes to any of the problems above then this is a great trading strategy for you.
Before we continue let me just give you a taste and glimpse of what the 60 Min Break Downtrend Line At Rising Daily 20 MA trading strategy can do.
At first glance I think you may feel that it is too good to be true.
However, this is not something that is elusive. Yes, there are trading strategies that can give you a very good reward to risk ratio.
Learn this trading strategy and then observe it in the stock market. Paper trade it and see if it works for you.
If it does help you come back and leave a comment below.
The reason why this trading strategy works so well is because we are using 2 very important technical concepts.
I will introduce it to you now.
The Rising 20 Day Moving Average
The 20 day moving average is a powerful trend following tool which you can use to ride the trend higher.
What we want to see is the 20 MA rising.
The keyword here is "rising". More on that later.
This is the same chart that I showed you earlier but this time I have put in the 20 MA, 50 MA and 200 MA.
The red line is the 20 MA, the blue line is the 50 MA and the yellow line is the 200 MA.
Here are some principles that you need to learn:
When the stock is above its 20 MA, we consider it to be short term bullish
When the stock is above its 50 MA, we consider it to be mid term bullish
When the stock is above its 200 MA, we consider it to be long term bullish
That is the basic principle when it comes to using the 20 MA, 50 MA and 200 MA.
For the purpose of our trading strategy we always want the stock to be above its "rising 20 MA".
A rising 20 MA hints to short term bullishness and as long as the 20 MA is rising, there is a high probability that it will continue to move up in the short term.
Notice in the chart above, when the stock touches the 20 MA, it soon shot up very fast.
Before that, the stock was trading sideways a bit. When a stock rises, there are times that it will need to take rest.
One great way to determine when the stock is ready to explode higher is to use the 20 MA. Most of the time, when a stock hits the rising 20 MA, they can move higher.
We are taking advantage of this fact and employing it as a trading strategy for us.
The 60 Min Break Down Trendline
If you have come across trendlines, you will know that they can be very useful tools to spot a change in trend
When a stock breaks a downtrend line it is hinting to us a change of trend from downtrend to uptrend
While the break of a down trendline can hint of bullish moves in many time frames, we only want to look at the 60 min chart.
We want to see if the stock can break above a 60 min downtrend line.
The chart above shows the 60 min chart of ARDX when it was touching the daily 20 MA.
You can draw a downtrend line by connecting the highs in the stock.
I have drawn the downtrend line in the chart.
Once the stock breaks above the downtrend line you can buy the stock. A stop loss can be placed at the most recent swing lows.
Criteria For The Trading Strategy
Now that you have learned a bit about the 20 MA and also the downtrend line, it is now time for us to combine these two technical concepts to find a trade.
Here are the criteria for the trading strategy:
The stock must be at the rising 20 MA or extremely near the 20 MA
The stock should be trading above the 20 MA, 50 MA and 200 MA in the past few days
Zoom into the 60 min chart and see if you can draw a downtrend line
There must be a downtrend line
Once the stock breaks above the downtrend line, buy the stock
If the downtrend line is too steep, then enter when stock trades above the 60 min 20 MA to avoid whipsaws
Put a stop loss at the nearest swing low in the daily chart
The chart above is the daily chart of ANF and in this chart it gave traders 2 trading opportunities.
Notice how each time the stock was touching or very near the rising 20 MA.
How do you spot a trading opportunity?
When the stock is near or at the rising 20 MA.
It is quite easy to spot the trading opportunity because the stock will trade near to the moving average. If you colour the moving average nicely just like I made it red colour, you can spot it easier.
Notice how the stock was above the rising 20 MA, rising 50 MA and rising 200 MA most of the time.
This told us that the stock was in a very bullish uptrend.
You just need to know where to enter to participate in its bullish rise.
Once you have spotted the trading opportunities, you now zoom into the 60 min chart to find an entry point.
The chart above is the 60 min chart of ANF.
In Opportunity 1, the stock broke a downtrend line.
The stock also formed a double bottom chart pattern.
TIP : When the stock also forms a bullish reversal chart pattern in the 60 min chart, this supports the bullish case and your trade becomes a high probability trade.
You can draw a downtrend line by connecting as many highs as possible. In this case, we only need to connect two highs and that is good enough.
The downtrend line was quite steep.
So it can be quite dangerous to enter early as you may get a whipsaw. So the best thing to do is to wait for the stock to move back above the 60 min 20 MA.
That will be the red line in the chart above.
Once you enter the stock, put a stop loss below the recent swing low. You can also put the stop loss below the entire double bottom chart pattern.
How To Take Profits And Ride The Trend Higher
If you remember the Opportunity 2 in the earlier chart, you will notice that after the setup the stock went higher by a lot.
Stocks that are in an uptrend tend to move up a lot.
The question for you now is how do you take profits and ride the trend higher?
In Opportunity 2, the stock broke above a 60 min downtrend line. Notice from the chart above that the stock also formed a cup with handle chart pattern in the 60 min chart.
This supports your bullish case and give more weight to the bullish setup.
You can buy the stock once it breaks above the downtrend line.
Put a stop loss below the entire cup with handle pattern.
To take profits and ride the trend higher:
Take 1/3 of your position off the table when the stock drops below the 60 min 20 MA
Then raise your stop loss to breakeven. This will give you a free trade
Ride the remaining 2/3 position higher as long as it stays above the daily 20 MA
I have just taught you a simple trade management tool.
You use the 60 min 20 MA to take some profits off the table and then you use the daily 20 MA to ride the trend higher.
Sometimes the remaining positions can really give you a huge return.
Since we are trading stocks that are already in an uptrend, it is possible for the stock to rise mightily and give you a huge reward to risk ratio on your trade.
ANET Gives 2 Trading Opportunities
It's amazing how stocks can often give you multiple trading opportunities when they are in an uptrend.
That is why I always advice traders and readers to play stocks that are in an uptrend.
The daily chart of ANET above shows how the stock is in a strong uptrend.
How do we know that the stock is in a strong uptrend?
When it is...
above the rising 20 MA
above the rising 50 MA
above the rising 200 MA
That is a stock you want to buy the dips and the 20 MA helps you to find safe and reliable trading opportunities.
I have highlighted Opportunity 1 and Opportunity 2 in the chart above.
Now it is time for us to zoom into the 60 min chart for our entry.
In Opportunity 1, the stock made a higher low and broke above a downtrend line.
The trader can buy the stock the moment it breaks above a downtrend line.
The fact that the stock was making a higher low tells us that it has bullish strength and wants to move higher.
In Opportunity 2, the stock formed a reverse head and shoulders chart pattern at rising 60 min 200 MA.
The 60 min 200 MA can be a significant support area.
Traders can buy the stock the moment it gaps above the downtrend line.
A stop loss can be put below the swing low which is below the 60 min reverse head and shoulders.
The trader can sell 1/3 of the stock the moment it drops below the 60 min 20 MA
Then raise the stop loss to breakeven
Ride the remaining positions higher until the stock drops below the daily 20 MA
Summary
Congratulations on finishing this trading strategy. You have now learned a simple yet reliable trading strategy that gives you a high reward to risk ratio.
What you can do now:
Search for stocks that are near its rising 20 MA
Paper trade it
Learn about bullish reversal chart patterns
Once you have 7 winning paper trades, put in real money
Hope you have benefitted from this.
If you have any questions feel free to drop it in the comments below.
Happy trading!