A dear child has many names. The strategy below is called ‘lost momentum’ in my vocabulary, but it no doubt has other names too. It is in essence a form of trend-following strategy.
Ingredient No. 1: Define the Trend
I recommend using a simple or exponential moving average (MA) of more than 50 bars. Some have reported good results with the 62 period MA. I don’t want you to get too bogged down with rigid definitions. You are looking for a trending market, which trades above your chosen MA, and the MA is pointing up (for long positions – reverse the instructions below for short positions).
Ingredient No. 2: Define your Time Frame
You can use this technique on any time frame. I find it lends itself very well to day trading on the 15-minute chart, and swing trading on the four-hour chart.
Set-Up for 'Buy Signal'
Your chosen market is trading above your MA indicator and the MA is pointing up. If you observe that the market is taking out a previous low (that previous low must be at least 8 bars prior to the current bar), you now wait until the market closes back above the price point of the previous low. That is your buy signal.
[...] The technique stems from the observation that even in a trending market you will often find that price dips below a previous low, only to immediately resume its trend higher. All I attempt to do is to trade in the direction of the trend defined by the moving average. I reverse the instruction above for selling.
[...] In the morning, around 8 am, I look at what the high over the overnight range is. I then wait for the market to take out either the high or the low of the range. If, and only if, the market then trades back into the range, after having taking out the high or the low of the range, I prepare an order to enter the market at the 62 per cent retracement over the range. This order comes complete with a stop and a target too. It doesn’t trigger every day though.
Quoted from:
Tom Hougaard (2011) - Trading at the Top: Trading Tips and Strategies from a Professional Trader.
Tom Hougaard (2011) - Trading at the Top: Trading Tips and Strategies from a Professional Trader.