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Looking for a trading strategy that has a good reward to risk ratio?
If you are looking for a trading strategy that is suitable for someone who has a day job, then this trading strategy might be a good fit for you.
The setup occurs quite often and you can often find 3-5 good setups in a month.
Imagine just trading 3-5 stocks each month and earning a nice return on it. This will help to grow your trading account in the long run.
Resistance once overcome become new support
One of the interesting technical concepts that you need to learn is that a resistance once overcome will become new support.
For example, the stock may find it hard to go above $50.
$50 is the resistance.
Let's say by the end of the week, the stock is able to trade up to $55.
$50 which was once a resistance will now be a support area. That means if the stock drops back to $50, there is a high possibility that the stock will reverse back up.
If you look at the diagram above, the swing high on the left now becomes a new support. We want to see the stock trade sideways at the area of the swing high.
That is why I named this trading strategy:
"The Daily Consolidation At Support Breakout Trading Strategy"
If you have never come across this trading strategy that's ok. That's because I am the creator of this trading strategy.
Maybe someone has found this pattern before and call it another name. But so far I don't think I have come across it anywhere yet.
With this trading strategy, we want to see the stock consolidate or trade sideways at the previous high support.
Once you understand the concept:
We draw a rectangle box over the entire consolidation area
We buy the stock when it breaks above the box
We put a stop loss below the box
Simple right
To get an initial target, we take the height of the box and project it upwards to get an initial target
But most likely the stock will continue to move much higher than the initial target.
Example 1
Ok, this is what the setup looks like in real life.
Compare the chart above with the diagram before that.
We always need a former high
The stock must trade above the former highs (slightly will do)
The former highs now becomes a new support area
The stock must trade sideways at the new support area (at least 8 bars)
The consolidation should be above the rising simple 20 MA (red line in chart)
Draw a box over the consolidation area
Buy the breakout above the box
Put a stop loss below the lows of the box
To get an initial target, take the height of the box and project it upwards from the breakout. I think the stock more than met its initial target. In fact it moved way higher.
How to set a target for this breakout trading strategy and ride the stock higher
Besides the initial target, I want to teach you how to set a realistic target and learn how to ride the stock higher.
If the stock has a rapid rise, then we can take the height of the rise to the consolidation as a "pole"
Take the height of the pole and project it from the base of the consolidation to get a measured move target.
You can see from the chart above that the stock nicely met its measured move target.
Once the stock met the measured move target, the trader can sell off the entire position or keep some position to ride the trend higher.
The way to ride the trend higher is to use the rising 20 MA. The 20 MA is the red line on the chart. I like to use the simple moving average.
Stay bullish on the stock as long as it is above the rising 20 MA.
When the stock drops below the 20 MA you can sell off the remaining positions that you have.
Raising the stop loss to breakeven
Some traders like to raise the stop loss to breakeven (purchase price) when their position starts to work for them.
You can raise the stop loss to breakeven when there is a 1:1 reward to risk ratio.
That way you can have a free trade.
Example 2
Here is another trade example but with a slight variation.
The previous high is not a swing high. Instead it is an area where the stock formed a rounded top and then decline.
This can be a very stubborn area to overcome. However, the stock was able to move above this area.
The stock starts to consolidate at this area.
What was once a resistance now becomes a new support area.
As the stock consolidates you can draw a box over the sideways trading.
Buy the stock when it trades above the box. Put a stop loss below the box.
The trade is still running but as you can see, the initial target has already been met.
Example 3
This is the perfect textbook kind of example.
The stock rose rapidly after the correction. It then traded sideways at the previous high.
The previous high now becomes a new support area.
Once again, the trader can just draw a box over the consolidation. Notice how the box was near the rising 20 MA.
TIP : When the consolidation is near the rising 20 MA it gives a high probability trade as the stock has rested enough and ready to move higher.
Because there was a rapid rise before the consolidation, we can take the height of the move and treat it as a "pole".
Take the height of the pole and project it upwards from the base of the consolidation.
As you can see the measured move target has been met.
Some trade management tactics:
Sell 1/2 when the stock meets its measured move target
Raise stop loss to breakeven
Sell remaining 1/2 of position when it drops below the rising 20 MA
Summary
You now have learned a trading strategy that is reliable and suitable for a person with a day job.
This trading strategy has a good reward to risk ratio
You have learned how to enter, put a stop loss and exit the stock
You have also learned about trade management
You also learn how to set a target and use the 20 MA to ride the trend higher
Now what you need to do is to put in proper money management.
Never risk more than 5% of your trading capital on a single trade.
Hope you find this trading strategy helpful. Paper trade it. Once you have 7 successful trades, move on to real money.
Happy trading!