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Introduction
The Buy Sell Line trading method is a trend following strategy. Many profitable trading
opportunities appear during strong trends while losses tend to accumulate on choppy
consolidating markets. Thus, trading should occur only on trending market condition. To
assure this, the 50 SMA represents the line where above we are buyers and below we are
sellers, hence the buy sell line. Engulfing bars in the direction of the trend are the entry
signals.
Trend
This trading strategy works best on strong trending markets and loses in consolidating
markets. A steep slope of the 50 SMA helps to identify strong trends while a flat 50 SMA with
price bouncing above and below expose a choppy market where trading should be avoided.
Magnetic Effect of MA
Since moving averages act like magnets it is best to trade setups that appear near or
rejecting the 50 SMA for best risk reward probability. The further away from the 50 SMA the
more a reversal to the 50 SMA is probable and thus a lower risk reward probability for a
successful trade setup.
Rules
1. Above the 50 SMA only long entries allowed, below only short
2. At least 1:2 RR potential on each trade
3. Check major and resistance levels to avoid trading into them
4. Avoid trading too big bars, check previous performance for limits
5. Do not trade between NY close and Asia session
6. Do not trade below 1H time frame, best is 1H/4H
Entry
Engulfing bars in the direction of the trend with stop loss just below low of the engulfing bar.
Enter with limit order on 1 pip above high of engulfing bar, this is crucial to avoid false signals
and to make sure momentum is behind the setup.
Entry #2
Alternative entry method on candles that close in the 25% top/bottom range (pin bars and
momentum candles) where the high/low is the highest/lowest high/low of the last 5 candles or
the high/low of the previous candle is the highest/lowest high/low of the last 5 candles.
Exit
Exit the trade on 1:2 RR. Alternative is to use a trail stop manually behind latest candle in
order to catch big market moves.
Trade Management
Move stop loss to break even once 1:1 RR is reached. On strong trends, to get most out of
the market, use a trailing stop like described above.
Fibonacci retracement ratio of impulse leg, from starting point to swing high (SH),
outside return at 0.382/0.618/0.786. CP 1 FRTR
Fibonacci extension ratio (projection) of impulse leg or major market move, the new
swing high (SH) will likely touch the 1.618 or 1.272 projection level. Good for
retracement entries or counter trend moves if major structure left at same level. Fibo
projection levels are good confluence for reversals/retracements in combination with
structure. CP 1 FEXT
Money Management
Use constant euro risk on each trade. The amount of risk cannot be decreased because on a
losing streak this means that more winners are necessary to make up the losses than
constant risk. The risked euro amount will be incremented after a substantial capital
increment, for example every 1/3 of capital growth. Once incremented, next increment (delta)
is again 1/3 of full current capital. When incrementing the euro risk amount, do not exceed
3.33% of full capital, because if a drawdown happens with a losing streak of 10 consecutive
losses, 33.3% of capital gets lost (drawdown). Losing more that 1/3 of capital on a losing
streak is not acceptable.
Each setup must give at least 1:2 risk:reward to be considered as potential valid.
Position Size
The size of the position must met the constant euro risk amount.
units=(
/ pip at 1 lot=
pip size
100000
exchange rate
Pip size is the smallest pip value of currency, for example 0.0001 for EUR/USD and 0.01 for
USD/JPY.
Example 1
Account currency: EUR
Pair: AUD/JPY
Euro Risk: 100
Stop loss: 43 pips
/ pip=
9.982 USD
=7.63 EUR / pip
1.3084 EUR /USD
position size=(
100
100000
)(
) 30479 units
43 pips 7.63 / pip
Example 2
Account currency: EUR
Pair: XAU/USD (Gold)
Euro Risk: 200
Stop loss: 500 pips
Gold and Silver position sizes are measured in ounces or lots, depending on broker.
Shorting: XAU/USD
Entry: $1649.65
Stop loss: $1654.65
Exchange rate EUR/USD: $1.33374
The position size is 53 ounces. Some brokers measure position sizes for gold/silver in lot
sizes. For example, if the broker sets 1 lot = 100 oz then the lot size would be 53.35/100 =
0.536 lot.
Future Work
Trading is a process that requires continuous improvements, optimization, research and
integration of new methods.
This trading plan is just the starting point. Possible optimization on RR (retracement entries of
bars etc...) and trade management (trailing stop) should be investigated.