Long Term Strategy

Using moving averages and price structure.

Long term

In this section, we are going to be looking at how we trade long term. These will be done by using different time frames to look for the overall trend, short-term trend and price structure and moving averages to confirm retracements points and entries. These points will be boosted by using RSI as a form of confirmation on what the averages and price structure will be telling us. let us not forget that moving averages are trend indicators that dynamically calculates the mean average of prices over a defined number of past periods. We prefer this indicator in combination with the RSI to trend long term because It helps smooth out price action by filtering out the noise from random price fluctuations and it gives a clearer indication of price trends. These are some of the ways we will be using moving averages in combination with the RSI to help give us the edge: 

  •  Identifying a trend
  •  Identifying Support & Resistance levels
  • Identifying price breakouts
  • Measuring price momentum

Normally, a longer-term map of the trend gives us much reliable perspective on the fact of what's going on with the market. In order to identify a trend, you should take a look at a longer-term chart like Weekly or Daily to see what the major direction of the price is. Remember that this is very important to make sure you are not on the wrong side of the market because a large number of big losers easily had too many trades against the major trend. To identify the longer term trend you can draw 200 EMA and 50 EMA onto the chart. Simply when the 50 EMA is above the 200 EMA and at the same time the price is above the 200 EMA long term wise, the price will be trending upwards. same applies to the downside when momentum and price are going down.

Why we use EMA's

The most popular and most used moving average is the simple moving average, however, we find it to be too longing and not very sensitive to price. While the simple moving average is a lagging indicator, we may find a way to reduce the lag. To do this, it is better to use another kind of Moving average which called Exponential Moving Averages. Exponential moving averages reduce the lag by applying more weight to most recent prices relative to older prices or In other words, it is a weighted simple moving average putting more weight on the today's closing price. The weighting applied to the most recent price fully depends on the period of the moving average. That means if you apply a shorter period to exponential moving average then you actually placed more weight to the most recent price. So we should take this into consideration that an exponential moving average (EMA) react much quicker to most recent price movements. Hence we choose it as our average choice to trade longterm.

These are the moving averages we will be using:

  • 36 Ema
  • 50 Ema
  • 200 Ema

in combination with 14 period RSI

Trading the chart

Once we have used a long-term analysis to identify to determine which way the perceived direction of the market is, we need to utilize smaller time frame charts to assist us with entry or exit points. While many components to the strategy lack subjectivity, selecting the best trading chart does have room for interpretation. The goal of this process is to take all the EMA indicators that we use and apply this to various time frames (e.g. D1, H4, M15)  in an effort to do two things:

  1.  We try to find charts that have good price movement to trade on. The following two examples of “Bad” and “Good” charts attempt to illustrate this. Note the large up and down market swings on the “Bad” example. This could suggest that the market is choppy and could be difficult to predict its next move. Remember, we are trying to find something that is moving in a consistent manner in one direction or the other.
  2.  Find a chart that when the EMA indicators are applied, matches the market direction of the long-term chart. For example, should the indicator on the long-term Chart exhibit indicator lines crossing and pointing upward (bullish signal) we now are trying to find a matching bullish indicator movement on the shorter time frame, trading chart

Rules on Trading the Long term

After you have identified a clear entrance point, or rather a retracement  that shows a very good entry, these will allow you to see clearly how to enter, where to put your stoploss and take profit. However it must be noted that the reason why we trade and use higher time frame to analyse and only enter on the lower time frame is because we want to get a better risk reward. Risk reward will always give you the edge in trading and with these long term strategy, one should at least get a 1:3 risk reward ratio before considering a trade. The picture above will be an example of the rules one should follow when entering trades on the long term strategy.The time frames which one can refer as long term is daily, weekly and monthly.

  • When it comes to entering a trade, identify a clear trading zone, when  we talk about trading zone, it is where we find structural zones like previous consolidation phase before reversal or previous support and resistance zone that is being tested. Example of a rectangular block shows previous consolidation zone. The moving average should have already shown divergence, meaning that a smaller moving average must be higher than the bigger one on an uptrend and lower than the bigger one on a down trend. Confluence between a strong support or resistance line in combination with moving averages where price will retrace to will be a strong entry point. Example will be on our entry as shown by the picture above, where price retraced back to the structural level which was in confluence with the averages.
  • After identifying a previous structural zone, you then should wait for a confirmation candle, these candles ,may be candle stick patterns like Dojis, tweezers and engulfing candles. 
  • Enter on the close of the confirmation candle using either brake rule as covered under candle stick pattern or retracement rule. 
  • The stop loss should be below the confirmation candles low or highs, example on the picture being the previous low under the wick.
  • The target should be the previous structural high on the weekly time frame to give a better risk reward as seen on the picture.

A precise entry that gives a better Risk:Reward ratio may be our entry at a 15 min time frame. the shorter time frame entry  being 15 min even though the main analysis was done on bigger time frame like weekly, monthly or daily, will have its own entry rules which will be clearly defined on the chapter after these one.

On the text above when talking about a clear trading zone, we only looked at one scenarios, however there are several scenarios that may take place that will need to be adheared by the trader. First of all how you look at the zone to trade depends entirely on the life of the trend, you should clearly recognize whether the trend is about to change or will still continue, these will help you in identifying the correct price structure and applying the right rules on your trading.For example, when looking at the structure of an ending trend, depending on the reversal pattern that is formed, the neckline place a very important role. when looking at the structure where trend is continuing, a breakout of that structure is vital, however usually the averages form a zone where price retrace to where these patterns are going to fail.

The picture above is the picture of different reversal patterns,( Double Top, Double  Bottom, Head and Shoulders, Inverse Head and Shoulders, Rising Wedgem, and Falling Wedge) the red line represent the neckline in all patterns except for the rising and falling wedge. As discussed on how to enter rules above, a trader will have to wait for the break of the neckline, these will be confirming that the reversal is indeed taking place, after the break, wait for price to reverse back to the neckline, when it has reversed you then look for your entry signal as discussed above by looking for candle stick pattern that may be formed in that area to give you a good entry signal. As shown on the picture above showing entry signal, when the price reverses back to the structural zone, there's usually confluence with the EMA, which is why we love these method. on the case of the Rising or falling wedge, the red line represent the failure structure line, after a break of that line, you wait for price to retrace back to the line and where there is  a clear confluence zone just next to our red line and then you look for candle stick pattern and enter.

The picture above shows pattern that occurs when the trend has already started moving. We call them retracement patterns, it is after a trend has already made a reversal pattern and has trending in a new direction, usually after a thrust in a new direction, it turns to relax, and retrace back as shown on the rules of entry on the first picture in these chapter. when it relax and retrace back, it usually gives us opportunity to enter and ride that trend. usually these pattern (Pennants, wedges, rectangle and triangles) as shown on the picture above during failure gives us the opportunity to enter and ride trends, we enter during the stage of failure and trend is about to continue. these failure usually occurs at a confluence zone where we find EMA's coinciding with support and resistance. at these areas we then also look for candle stick and follow the entry rules as stipulated by earlier on the rules of how to enter long term trades. 

How to enter

As shown on the bigger time frame (D1) when waiting for the price to retrace back to the structural level as indicated by the blue box on the daily time frame, you will then enter the trade on a smaller time, the chart above is the price which was marked with the blue rectangle on a bigger time frame. Now once price gets into that area, you then switch to the 15 min time frame to look for price entry, As stated in the long term rules that for a better risk reward ration we may switch to lower time frames which will come with its own rules and settings while fulfilling the initial analysis of the bigger time frame in our case being daily. So the new rules on smaller time frame will be to have  a 10 ema and RSI with a 50 line. After identifying a good retracement on a bigger time frame, when switching to a smaller one, in our case looking for a buy after a retracement, you then must wait for price to cross back above the 10 ema, while the RSI cross above the 50 line, when these two points are fulfilled, you can then enter your trade immediately, when price crosses the EMA, it must close above the EMA. The stop loss should be below your lowest point and take profit being on the high in your bigger time frame as shown on long term strategy rules.

Once the moving averages have crossed, you must wait for the retracement back to the moving average, why is these important, when price for example in the picture moves upwards, it will break major structure levels as indicated by the purple line, the purple line is the neckline of the head and shoulder formed and with divergence as shown by the RSI, when a major structure level is broken, you must then wait for the level to be tested again by waiting for the retracement. the neckline level which was a strong  resistance area is now turning into support, that is the level we will watch and can put different combination of entries, One of the reason why we love such retracement is because we find strong confluence areas. As seen on the picture, the resistance level which has turned into support is right at the same point with our moving averages where we like price to retrace to and we enter. When such strong levels are at the same price, the likely hood of getting a good trade are high. So the when price is now at these levels on a longer time frame, you can enter in three different ways, you can either enter by placing a limit order, enter using a candle stick pattern on the area and still on the bigger time frame or eneter on a 15 min timeframe. On these chapter we will cover entries of the bigger time frame and the smaller time frame which is the 15 min time frame will have its on explanation because it uses different rules and indicators which is the 10 EMA and RSI with a 50 line, however it must be noted that even though we enter on the 15 min time frame, the area of entrance is still the same as indicated by the blue rectangle.

After price has retraced, you can put a buy limit on your confluence area an make your stop loss to be below the support line and moving averages while your target is the highest resistance on your bigger timeframe. which is the daily in our case.

Or you can be more conservative and wait for a candle stick pattern like Engulfing, dojis and hummers on the confluence area as indicated by the block and enter according to the rules of entrance as stipulated on the candle stick pattern lecture. Rules on entry are also stipulated on the previous chapter.