5 steps for Profitable trading strategy - The Profit Score

5 steps for Profitable trading strategy

Here, I’m not only going to show you some of the most useful trading techniques, but I’m also going to share these with the help of live market examples, so you can actually see how it will look when you will trade with real money. After all you don’t want to use a strategy that doesn’t even work.

Step One

If you have been trading for a while, you have probably realized that not all trading charts are worth trading. There are times when you should take more trades, because the market is perfect for booking big profits. But then there are times when you should completely avoid trading, because if you do, you might end up with multiple losing trades in a row. Instead of immediately looking for new trades, the first thing you should do is analyse, if the market is worth trading or not. This can be seen by the visual representation of the chart. If the trading chart is clean then it is worth trading and if the chart is showing haphazard movement, then stay away from trading. Hence her come s the first step that is cleanliness of the chart.

In the below example chart 1 is clean and is worth trading while the chart 2 is not worth trading and the price is flat and there are subsequent movement that are crossing the 200-period exponential moving average that we take for trend identification as this is the easiest way for trend identification. 

If we take trade in the direction of the long-term trend, we can achieve greater reward to risk ratios. In other words, we can make more money. So for a chart to be eligible for trade the price should stay above (for long trades) or below (for short trades) the 200 period exponential moving average for a while and the moving average should not be looking flat. The direction of the moving average should not be 03:00 O’clock. Further the chart should look cleaner with naked eye. This kind of chart is perfect for beginner traders, as the price action is easier to read, and your stoploss won’t get taken out because of a choppy price movement.

Many people lose money by taking too many losing trades in a bad market like shown in chart B. If your charts look similar to these, you should probably avoid trading at that time and wait till the trading chart become smoother.

Step 2

Once you filter the bad charts, and find a good stock, commodity or forex pair, it’s time for the step 2, where we will use the multi-time frame analysis to find more information about the chart. By more information I mean the points of interests where price has a higher probability of reacting. Sometimes, when you trade on a smaller timeframe, you might end up taking long trades, at a strong resistance level that is clearly visible on the daily time frame. This lack of information can make you lose money.

In the below example, I am taking one hour chart as a trading time frame and one day chart as a longer time frame for extra confirmation for support or resistance area or high confluence area. 

Here, I will draw the strong support and resistance levels that I can see. Since we are using the one-hour timeframe to enter trades, switching to the daily is not really necessary according to some people. But I like to do it to make sure I don’t end up taking short trade on a smaller timeframe at a strong daily support.

If you don’t know how to draw strong support and resistance areas, check how to draw support and resistance level in the relevant article, it has some good examples that you will find helpful. Once we have identified the areas on the daily timeframe, switch to the 4 hours timeframe, and look for other clearly visible areas and will take long or short trade accordingly in our one-hour time frame which is our entry time frame

Third Step

Now in the third step, we will use an entry signal indicator. I’m using the MACD indicator.

MACD strategy was one of the best trading strategies, that we have tested multiple time and found it most reliable. Also check the articles on MACD and histogram to know more about MACD strategies.

Since patience is the key, so wait for the MACD to give an entry signal. For long entry the MACD crossover should be below the zero line and for short entries, the cross over should be above the zero line. If you use a different entry signal indicator at this step, take entry according to your entry strategy. 

Now remember, in the third step, we are not executing the trade yet, because there is one more thing you have to calculate.

Fourth Step

In the fourth step, you have to calculate the position size by looking at your stoploss strategy. A lot of new traders make the mistake of setting a bad stoploss. Your stoploss has to be far enough from the entry so the price have enough room to wiggle around before going in your favour. And you have to decide where you want to set your stoploss before taking the trade. That’s because to get a consistent loss amount, you have to calculate your position size using your stoploss distance. According to the MACD strategy, the stoploss goes just below the swing low or swing high. 

Fifth Step

In the step 5, it’s time to set the profit target. Normally, we used fixed profit target, which will be 1.5 times greater than my risk. To get a 1.5 to 1 reward to risk ratio, we can simply multiply our stoploss by 1.5 to get profit target.

Once you have calculated all of these values, you can enter the trade. It might look like it takes a lot of time to calculate the stoploss, position size, and profit target before executing the trade, but it only takes few seconds once you get a hang of it. Furthermore, even if you are trading on a smaller timeframe like 5 minutes, you will have enough time to calculate everything properly.

Once you have taken the trade with a stoploss and profit target, you can simply close your trading platform if you are not looking for new trades. Once you have taken a trade, there is not really a point in staring at your chart. The price is either going to touch your stoploss, or your profit target.

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