The Perfect Stage 2 Uptrend

Before entering a trade, look for a nice prior uptrend (preferably for at least 6 weeks).

The prior uptrend’s price action should be as follows:

• No moving average crossover. In other words, the short term EMA stays above the long term EMA during the prior uptrend.
• Price rarely close below the short and long term EMA
• Candles are mostly trendbars or small dojis. There should be no wild swings or ‘comb-like’ price action.

The uptrend should preferably display the following volume action:

• Volume should increase as price increases
• A breakout after a slightly pullback should be accompanied by above average volume

Additional Rule:

• During a Stage 2 or Stage 4 trend, do not enter after the third pullback
• If price pulls back significantly such that the two moving averages almost cross and there are more closes that breach the moving averages, reset the pullback count to zero.

Indicators used:

• EMA 10 and EMA 30 for price
• EMA 15 for volume

Additional Notes

The criteria above works for Stage 4 too. However, given that prices tend to fall much faster, for a bearish trade, consider entering the trade earlier. Instead of waiting for a prior downtrend for the past 6 weeks, you may have to reduce it to just 3 to 4 weeks.

Next, when I say comb-like price action, I’m referring to price action like the chart below, where you see a lot of tails on both sides of the candles, but the candle is not a doji (i.e., the candle does not close near its open).

Motto to Remember

It’s not that most good trades look like the setup above, but that most setups that look like this are good trades.

Maybe only 30% of the profitable trades look like the setup above. But 75% of the time when this setup happens, the trade is profitable. Hence, I may miss 70% of the good trades, but I will increase my win-rate drastically.