Village Trader trading system
In this post, I will go into my trading system. I’m a trend trader so my system at its core is a trend-based system as will see below. This article focuses on the daily chart (because that’s what I trade). However, its principles could be applied to any time frame and any asset class. I just use it to trade the equities markets using CFDs.
Determining the trend.
As a trend trader, my first point of call is knowing which direction of the market I want to be in. Before I continue let me clarify, by “market” I mean the stock itself not the general market (index). To determine the trend I apply the Elder’s triple screen system. I step back to the weekly chart to get my primary trend. I also apply Simon Brown’s lazy system’s way of determining the direction of the market. I use Exponential Moving Averages ie the 30 EMA and the 60 EMA.
- 30 EMA > 60 EMA The trend is up
- 30 EMA < 60 EMA The trend is down.
It doesn’t matter by how much. If I get a long trading signal and the trend primary trend is down, I ignore that signal and vice versa
Wind at my back
Now that I know the direction I want to be in. I need the wind to be behind me. On the daily chart, I only trade with the 200-day Exponential Moving Average behind me. If I’m long I want it to be below my trade and inversely if short I want it above my trade. If I get a signal and I’m facing the 200-day EMA. I ignore that trade even if the signal is in the direction of the primary trend.
I resolved never to risk more than 3% of my account balance on any single trade. The risk on the trade could vary from 1-3% depending on if adding into the position or it’s my initial position. Slippage is a factor as well. But if I suffer so much slippage that the trade would expose more than 3% of my account equity I pass the trade or place a limit order and wait for the market to come back and take me in. I never adjust my stop-loss against the trade only in favor of the trade. I cut my losers short by always having a stop-loss order in place on the market at all times
Adding into winners
When I find myself in a winning position I like to add on to my winners. However, I don’t like increasing my risk on that trade. So if I get a trading signal before my target is hit, I add into the trade. All subsequent entries must be higher(if I’m long), or lower (if I’m short) than my initial trade. The stop-loss of every subsequent trade but for me higher than the stop of my preceding trades. If the target of the new trade is further than the target of the older trades I just adjust the target of the older trades as well to the new target. If the target of the new trader is closer than the target of the old trades, I set the target of the new trader to be the same as the old ones. But the total risk on that trade should not be more than 3% of my account balance. Essentially I increase my potential reward on the trade but not my risk on the trade. I want to be bigger when I’m right and small when I’m wrong.
I want my stop-loss to be at least 2X Average True Range away. Generally, every setup will tell me where to place my stop loss based on the rules of that particular setup. Once I know where to place my stop-loss based on the setup I Check if that distance from entry is at least 2X ATR. If not I use 2XATR as my stop-loss.
Trailing my stop-loss
I use the market structure of higher highs and higher lows, lower lows, and lower highs to trail my stop. I also use a new trading signal to trail my stop. However, the 2XATR rule still applies. When I adjust my stop is should always be at least 2X ATR
I first determine how much I want to put at risk on the trade. Usually 2-3%%. I calculate how much 2-3% of my account balance. Secondly, get the distance from my entry to stop-loss(risk per share). Then I divide that risk per share into my risk on the trade to get how many shares I need to buy or sell. More on that here
Each and every trade I get into should initially give me a risk-reward ratio of at least 2:1, if not I pass the trade. From time to time due to slippage the risk reward ratio can be reduced to 1.9:1 or so. I’m comfortable with that 1.9 and higher. But if market gapped away from me such that my Risk-Reward is less than 1.9 I put a limit order and wait for the market to come back and put me in.
Methods of entry and exit
Each setup has its own entry, stop and target. I only exit at either stop-loss (trailed or original) or target. Once a trade I’m in gets into record high territory. I remove my Take-Profit order, at which point my exit will be just the trailing stop. I really want to let my winners run
My methods are
- Bullish & Bearish Flags
- Rising & Falling wedge
- Horizontal breakouts
- Cup and Handle
- Head and Shoulders
Methods in consideration
I’m also considering trading reversal charts and candle patterns. Reversing short term trends (daily) back into the primary trend (weekly). In a sense still trading in the Direction of the trend.
- Kangaroo tails (Dojis)
- Engulfing candles
Fo anr example when the share is testing its 200d EMA and finds support/resistance, and give me a Doji, kangaroo tail, or a divergence.