Hey guys, in this blog post, we're going to break down a full rules-based day trading strategy that works well in the forex, crypto, and stock markets. This strategy is perfect for beginners or struggling traders who are looking for an edge in the market and want to make a consistent income.
This price action trading strategy combines concepts of market structure, pullbacks, and advanced candlestick entry setups. If that sounds good to you, make sure to hit the like button to show your support and subscribe to our channel if you're new, as we publish many advanced trading knowledge.
Step 1: Identifying Market Direction
The first step in this strategy is to identify the market direction. We do this by applying a simple concept using the exponential moving average (EMA). We apply the 50 EMA on the chart and wait for the price to break it to one side and create a new high or low. This helps us determine whether we're witnessing a bullish or bearish market.
For example, if the price breaks the 50 EMA and the previous market structure to the upside and creates a new high, we have a bullish market. On the other hand, if the price breaks below the 50 EMA and the previous market structure, creating a new low, our direction is bearish.
Trading with the dominant trend improves your win rate and risk-to-reward ratio.
Step 2: Waiting for a Pullback
The second step is to wait for a pullback. We wait for the price to print at least two opposite colored candles after an impulse, which shows a sign of a temporary correction phase. This allows us to enter at a better price and catch maximum profits.
Step 3: Making the Entry
The third step is making the entry. We use two candlestick patterns as our entry to predict the end of the pullback and the start of an impulsive move. These reversal candlestick formations are advanced engulfing candlestick patterns.
Engulfing candlestick formation is one of the most powerful price action reversal patterns. To use the engulfing candle as our entry reason for the pullback strategy, it must meet certain rules:
The green candle's body must be bigger than the red candle.
The green candle has a lower low than the previous candle, indicating it is also a swing low.
There are only two valid entry reasons: the first engulfing pattern and the second engulfing pattern. Anything other than that is not a valid entry.
Now let's put things together and look at some real chart examples.
Trade when opportunities arise. Simplicity is the key to profitability. Before placing a trade, analyze the market structure. Consider higher time frame key levels and reversal chart patterns. Only enter the market if there is enough room before reaching the next level. Combining multiple time frames provides a clear and well-informed chart analysis. Pay attention to reversal patterns such as double top, double bottom, and fake outs. Back testing is important for obtaining the performance of your trading setup and gaining confidence. Stick to your rules and risk management plan during back testing. Use the Trader Edge platform for back testing exclusive trading strategies. In this example, the US30 has a bearish bias on the 1-hour and 4-hour charts. Look for pullback formations and confirm with engulfing candlestick patterns to execute trades. Set stop loss above the swing high and target two times the risk. If the price breaks key levels, expect the price to fall or rise depending on the scenario. Proper risk management is crucial for long-term success.
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