If you’re new to Forex or trading in general, then you have probably struggled to find any day trader systems that work for you. There is a ton free information on trading forex and other investment vehicles, but the trading systems that are given for free are seldom tested over long periods of time.
That’s right. Many of the trading methods that are freely available haven’t really been tested. They are being described by traders who have won just a few trades with their new technique, and are looking for feedback. I have, however, found several different trading systems that really work.
Two of these systems I found for free. One is my own creation but is based on one of the two free methods that I’ve picked up. Lastly, after paying for several courses, I came across Top Dog Trading. I have found Dr. Barry’s Top Dog Trading system to be so reliable, that I trade almost solely with his methods these days.
Today, I want to teach you about a simple setup that can be used for day trading, swing trading, or even long term investment entry points. I don’t remember where I originally picked this method up. For the purposes of this article, we will call this method the “simple momentum” trade (my trading journal nickname).
The Simple Momentum Trade
To use this setup, you will need to place a 13 SMA (simple moving average) on your candlestick chart. You will also need an RSI (relative strength indicator). Set your RSI to a period of 10, and apply the indicator to close. Lastly, add a line to your RSI indicator at 50.
The idea is to buy or sell crossovers of the 13 SMA when momentum (RSI) confirms the trade. Your entry would be the first candle to open on the other side of the 13 SMA if the RSI confirms a move in the direction of your potential trade (direction determined by 50 line). Sound simple enough?
The Trigger: Enter on the first candle to open causing a crossover of the 13 SMA (the red line in the image above) only when the RSI (the blue line above) is below/above the 50 line in the direction of your potential trade. In the first example above, we would have gotten in around 852.00. For a more conservative approach, you can wait for the setup candle to close.
Always make sure the RSI supports your trade. The steeper the angle of the RSI the better. Only take trades when the RSI has moved away from the 50 line a bit. In the picture above, notice that the RSI in the good example had created some distance from the 50 line in the direction of the trade.
In the failed setup (above, right), notice that the RSI hovered close to the 50 line until the third bar. At that point, however, price action had moved too far away from the 13 SMA. The failed setup would have worked this time, but we aren’t concerned with what happens once or twice.
Stop Loss: There are two different methods that I use for stop loss placement with this setup. You can place your stop 1 pip above/below the highest/lowest point in the most recent cycle high/low. Using the same example as before, we would’ve put our stop at 799.97. When determining stop loss levels for buy orders, remember to include the spread in your calculation.
Another more aggressive strategy is to place your stop loss 1 pip above/below the last candle that opened on the opposite side of your trigger candle. Using the same example as before, we would’ve placed our stop at 820.59. With this method, you will be stopped out more often, but winning trades will produce more favorable risk/reward scenarios.
Don’t Trade: If the candle that crosses the 13 SMA is not supported by momentum. In the second example above, we wouldn’t have taken the sell. By the time the RSI supported our trade, price had pulled too far away from the 13 SMA. Also, sometimes the candle leading up to the trigger candle will pierce too far past the 13 SMA. Those setups should also be avoided. The best setups come when you enter the trade near the 13 SMA.
Tips: This setup works better on longer time frames. I typically use this setup on daily, weekly, etc… charts. I have also used this setup with some success on the 4 hour, 1 hour, and even 15 minute charts. Try to avoid taking these trade setups during periods of consolidation. Bollinger bands and other indicators can be added to help identify and measure periods or cycles of consolidation.
Obviously, the “simple momentum” trade works better when you trade with the trend. It is always wise to use support/resistance to support your trade decision as well. As with any day trader systems, correct Fibonacci levels can provide you with good exits points as well as show you potential levels of support/resistance.
In my experience, I was able to routinely get 1:2 risk/reward with the trend and 1:1 counter trend trading with this trading strategy. With good money management and patience, this system can be profitable.
There you have it – a pretty simple trading plan, and one of the few day trader systems that I’ve found to really work. Stay tuned to see my other free trading strategies and much more, including a tweaked (higher probability) version of this day trading system. As always, practice or “paper trade” this technique successfully for a while before investing real money.