The 5MD50 Bullish Trading Strategy is a trading strategy that attempts to capture stocks that find support at the 50 day moving average. This is an aggressive trading strategy and therefore should not be attempted by everyone. Only those who are comfortable with taking quick and frequent losses will be able to tolerate this trading strategy.
This trading strategy is very much similar to the 5MD200 Bullish Trading Strategy. They both have the same entry points in the 5 min chart and the only difference is that the 5MD200 finds its trading candidates with stocks that are touching the 200 day moving average.
There is a reason why I named this the 5MD50 bullish trading strategy. As you will see later, the name is self explanatory once you understand it.
This trading strategy is a semi day trading - swing trading strategy. What this means is you can treat it as a day trade and even carry the trade into the next 2 days to capture a bigger reward.
As I mentioned in the opening paragraph, this trading strategy is very aggressive. We are really attempting to catch a stock that is going to rebound at the earliest time possible. Therefore, it is very likely we will get stopped out quite frequently. The rate of success can be 50% but it does not matter because the rewards are great if the trade works out.
Sometimes you can get 3, 5 and even 7 times rewards compared to the risk.
The risk reward ratio is something that professional traders give a lot of weight to. If a trading strategy has a high enough risk reward ratio, then it does not matter even if the winning rate is only 50% or 60%. We do not need a high winning rate to be able to make money in the stock market.
Now that you understand a bit about how this trading strategy works, let me take continue to describe in detail how the entire trading strategy functions and then you can decide whether this trading strategy is suitable for you or not.
The 5MD50 Trading Strategy actually revolves around the 50 day moving average. If you have been trading for quite some time, you will often come across many many traders talking about the 50 day moving average. That's because it is one of the most talked about and most observed moving average that traders and fund managers look at.
Many many stocks that are in an uptrend tend to correct to the 50 day moving average and find support there. They will often bounce off the 50 day moving average and continue to move up. Some may have a few days bounce up and some will have a tremendous rise after they touch the 50 MA.
And of course there will be some stocks that will not find support at the 50 MA. It's just the way that the market works and which is why you will experience losses in your trading career.
The chart above is the daily chart of ADBE. The red line is the 20 day moving average, the blue line is the 50 day moving average and the yellow line is the 200 day moving average. I keep these 3 moving averages on my charts all the time because they help me to gauge the health of the stock.
When a stock is above all 3 rising moving averages, it is a picture of strength and health in the stock. Notice how ADBE stayed above these 3 rising moving averages most of the time. Which is why the stock continued to move higher and higher. In other words, the stock is in an uptrend and therefore it is likely to go higher in the future.
The trend is indeed your friend.
What I want to bring to your attention in this stock chart is how ADBE manages to find support at the 50 MA (blue line) most of the time as it corrects to that area. See how ADBE bounces off the 50 MA and rose higher. Each time it touches the 50 MA, it bounces higher for a few days.
What we are seeking to do is to enter the stock as it touches the 50 MA.
To time the entry for this trading strategy, we will zoom into the 5 min chart and look for safe areas to enter. Ideally, we enter when the stock is bottoming in the 5 min charts. There are no guarantees of success but at least it gives us an opportunity to profit from the 50 MA phenomenon.
Not every stock can be a trading candidate. Even if a stock touches the 50 MA, there are good ones and bad ones. Therefore, we need to filter out some of the best setups so that we can get the best candidates.
Here are some tips to find the best trading candidates:
The above are some safeguards to find some of the best trading candidates for this trading strategy. I have often found that stocks that have a big red candlestick bar like a huge long red bar because of heavy selling can often make the 50 MA not work properly. The presence of extreme bearishness does not help.
Similarly, the presence of a big gap down prior to the stock hitting the 50 MA is also not a good sign. Gap downs are bearish and may cause the stock to go below the 50 MA without it supporting the stock that much.
Once you have found the ideal trading candidate, it is now time to enter the stock. So how do you actually find the best time to enter? All traders are actually market timers. We try and find the best time to enter the stock and for that, we employ the 5 min chart.
There can be a lot of bearishness in the daily chart but when you zoom into the 5 min chart, it can often tell you that the stock is bottoming in the smaller time frames. The presence of bottoming chart patterns in the intraday chart can often tell us that the stock is going to rise.
Some patterns include:
If you see some of these patterns happening in the 5 min chart, the chances of success becomes higher.
The chart above is the daily chart of JBHT. The blue line is the 50 MA if you remember. See how it has help the stock find support and bounces off it. No doubt that those would have been great trading opportunities. The latest one happened around early November 2017 where you can see a bottoming tail happen as the stock nears the 50 MA.
Please note that the stock does not necessarily need to touch the 50 MA. All it needs to do is be very very near the 50 MA. If its too far, then it will not be a candidate. Near is good enough.
If you look at the latest bounce off the 50 MA, it looks like a very small bounce compared to the previous 2 bounces but it was good enough to give observant traders a nice risk reward trade.
Now that we have identified a trading candidate, lets zoom into the 5 min chart of JBHT.
Okay, the chart above is the 5 min chart of JBHT. That is the day when the stock comes very close to its 50 day moving average. So how do you enter the stock?
Once again, you will notice that there are moving averages in the stock chart. Even in the 5 min chart, I put moving averages on it to help me filter out when is a good time to enter and when is a good time to avoid the stock.
I like to use the 5 min 50 MA to act as a filter. In the example above, the trader can enter the stock when it trades above the 5 min 50 MA. To make it easier to see when we should enter the stock, I have colored the area below the 5 min 50 MA as red color.
Red which is the color of "do not go" in a traffic light. Similarly in the chart, it tells us not to do anything with the stock when it is in the red zone. We enter the stock when it goes above the red zone into the white zone.
If you are observant, you will also notice that the stock was actually making an ascending triangle chart pattern as it bottomed. Ascending triangles can be continuation patterns as well as bottoming patterns. If you remember earlier, I mentioned about bottoming patterns happening in the intraday charts.
Its always a bonus to see bottoming patterns in the intraday charts when the stock trades back above the 5 min 50 MA. It gives an added layer of confidence that the trade will work out.
Since not all trades are going to work out, we need to have a stop loss.
Stop losses are important because it allows us to control the maximum amount of loss in a trade. We do not really have control over the direction and behavior of a stock but we can always control how much we will lose if the trade does not work out.
Placing a stop loss in this trading strategy is easy:
What this means is if you enter on that day, take a look at the lows that the stock made during the day. Put a stop loss just below the lows of the day. You can opt to put it $0.05 or $0.10 or $0.20 below the lows of the day.
The chart above is the daily chart of ORLY. As you can see, the stock has some success in bouncing off the 50 MA. It also had a failed attempt and the stock went lower. Imagine if you did not have a stop loss. You would have suffered a bigger loss than you intended.
Now, take a look at the latest successful trade. The stock corrected to the 50 MA and then a big green candle appeared. That in itself is a big run up in the intraday charts which you can see below.
The chart above is the 5 min chart of ORLY on the day it corrected to the daily 50 day moving average. The stock actually went through an entire stock market stage from Stage 4 Downtrend to Stage 1 Basing to Stage 2 Uptrend and Stage 3 Topping. If you want to learn more about market stages, read The 4 stages that every stock and market goes through.
Notice how the stock made a double bottom which marked the intraday bottom for ORLY. Shortly after the appearance of the double bottom, the stock went above the 5 min 50 MA. As it enters into the white zone, that is when the trader will enter the stock.
So where do we put the stop loss?
Simple, just put the stop loss below the low of the day.
The next trading day, the stock continued the 5 min uptrend and had a nice 5 min bull run. The big bull run is what made the large daily green candle.
So how do you take profits on trades like this?
When it comes to taking profits there is no one size fits all. Experience will teach you how to take profits in the best way but here are some examples of when to take profits.
The above are just some ways to capture and protect your profits.
We have no way of knowing how high the stock can go up but don't be surprise if you can make a risk reward of 1:5 with this trading strategy. This makes it worthwhile when you know that your success rate with this trading strategy is probably around 50%-60%.
For those of you who are not familiar with the concept of risk reward ratio, I highly recommend that you take a read of the article. It will open your eyes to how professional traders can make money even when they are only correct 50% of the time.
You have now learned a trading strategy that is quite aggressive but with good rewards. Do not look at the trading results only after 10 trades. You will find ample opportunities to play this trading strategy as everyday there will be lots of stocks that will hit the daily 50 MA. Judge the results after 50 trades. The best way will be to paper trade. Once you achieve some success with this trading strategy, then consider playing it will real money.
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