Strategies

Now that you know the basics and understand how to read charts and place trades, it's time to learn about trading strategies. A strategy is a structured plan that helps you make consistent decisions in the market.

What is a strategy?

A trading strategy is a set of rules and guidelines that determine when you open a trade, where you place your stop loss, and where you set your take profit. A good strategy helps you to:

• Avoid emotional decisions
• Achieve consistent results
• Manage your risk
• Learn from your trades

Without a clear strategy, trading is gambling. With a strategy, you make planned decisions based on objective criteria. Below you'll find a detailed explanation of the two most commonly used strategies.

Reversal strategy

A reversal strategy is based on the idea that after a strong move, the price often returns to a previous level. You trade against the current (intraday) price movement, expecting the price to reverse.

How does it work?

• The price makes a strong move against the direction of the daily trend
• You identify an important support or resistance level
• You wait for the price to reach this level and give a reversal signal
• You trade expecting the price to reverse

Concrete rules and guidelines:

1. Trend identification:
   • First determine the trend on a higher timeframe (1d = daily)
   • Reversal trades work best in a range/sideways market or with the daily trend
   • Avoid reversal trades against the daily trend
2. Level selection:
   • Look for important levels where the price could reverse (the more often a level is tested and respected, the stronger it is)
   • Yesterday high/low and round numbers can also be good candidates
3. Entry signals:
   • The setup must form close to the level
   • Wait for a bullish candlestick pattern at support (for example hammer, bullish engulfing)
   • Wait for a bearish candlestick pattern at resistance (for example shooting star, bearish engulfing)
   • Ending volume: ideally you see a volume increase at the reversal candlestick
4. Stop loss placement:
   • For long reversal: stop loss just below the support level
   • For short reversal: stop loss just above the resistance level
5. Take profit placement:
   • Just before the next level or the VWAP
   • Only take the trade if there's at least a 1:2 risk-reward ratio between entry and your target
   • You can consider taking a partial and let part of the trade run to a higher target
6. When NOT to trade:
   • During important news events
   • In the first 10-15 minutes after market open
   • When the trend on a higher timeframe is very strong (then we look at the breakout strategy instead)
   • With low volume during the reversal signal (no confirmation)

Breakout strategy

A breakout strategy (for long) or breakdown strategy (for short) is based on the idea that when the price breaks through an important level, a strong move often follows in the same direction.

How does it work?

• The price consolidates around a support or resistance level
• The price breaks through the level with increased volume
• You trade with the direction of the breakout, expecting the movement to continue (continuation)

Concrete rules and guidelines:

1. Level identification:
   • Identify clear support or resistance levels
   • Only trade a breakout with the daily trend
2. Breakout confirmation:
   • The breakout must be accompanied by increased momentum
   • Without extra volume, there's a high chance of a false breakout, or fakeout
   • The candlestick that breaks through must be strong (large body, few wicks)
   • Price must clearly break through the level, not just hang around it
3. Entry:
   • Option 1 (safer): Wait for a pullback to the broken level (now become support/resistance) and take the entry on the break of that
   • Option 2 (more aggressive): Enter directly when the price breaks through the level
   • Use a limit order to prevent slippage
4. Stop loss placement:
   • For long breakout: stop loss just below the last low
   • For short breakdown: stop loss just above the last high
   • Stop loss must fall outside the consolidation zone
5. Take profit placement:
   • Fixed TP: Minimum 2R and maximum just below the next level
   • Only take the trade if there's at least a 1:2 risk-reward ratio
   • You can choose to take partials and let part of the trade run
   • You can choose to trail: raise the stop loss gradually to just below the last closed 2m or 5m candle, until you're stopped out
6. Watch out for false breakouts:
   • Low volume at breakout = likely false
   • Price breaks through but immediately returns = false breakout
   • No follow-through after breakout = weak movement
   • If you're in a false breakout: close the trade immediately (your stop loss should catch this)
7. When NOT to trade:
   • During important news events
   • With very low volume and/or momentum
   • When the trend on a higher timeframe runs against the breakout direction

Scalping

Scalping is a very short-term strategy where you try to make multiple small profits by quickly entering and exiting. Positions are often closed within minutes or even seconds. This is a strategy that requires a lot of market insight and experience and is therefore less suitable for beginners.

How does it work?

• You use very short timeframes (1m, 2m, or 5m)
• You make many trades per day
• Your goal is small, consistent profits
• You close the trade quickly if it doesn't work

Concrete rules and guidelines:

1. Timeframe and market conditions:
   • Use 1m, 2m, or 5m timeframes
   • Only scalp during high liquidity (first 2 hours after market open, last hour before market close)
   • Avoid scalping during important news or low volume periods
   • Focus on very liquid stocks with small spreads
2. Setup identification:
   • Look for small consolidations or ranges
   • Wait for a clear breakout or reversal within the range
   • Use VWAP as an important reference point
   • Price must be clearly above (long) or below (short) VWAP
3. Entry:
   • Enter directly at the signal
   • Wait for volume confirmation: small volume spike at entry
   • Entry must be fast: if you wait too long, you'll miss the move
   • Use order books or order flow if available for accurate entries
4. Stop loss placement:
   • Stop loss is usually very tight: 0.25-0.5% of the entry price for liquid stocks
   • Stop loss must fall just outside the recent high/low
   • If your stop loss is too far, it's no longer scalping
5. Take profit placement:
   • Target is often small: approximately 1:1 risk-reward ratio
   • You can use multiple small targets (for example 0.5R, 1R, 1.5R)
   • Exit quickly if the movement stops
   • Use trailing stop for larger profits if the move is strong
6. Exit strategy:
   • Exit immediately if the price moves against you without reason
   • Exit if volume drops off
   • Exit if the price reaches your target
   • Exit if an opposite signal appears
   • Important: With scalping, speed is crucial. Doubt = exit
7. Risk management:
   • Risk maximum 0.5-1% of your account per trade
   • Maximum 2-3 open scalps at the same time
   • Stop scalping after 3-4 losses in a row
   • Keep track of your win/loss ratio: aim for at least 50% profitable trades
8. When NOT to scalp:
   • During important news events
   • With low volume or low liquidity

Entry and exit strategies

Your entry strategy determines how and when you open a position. Your exit strategy determines how and when you close the position again. Your choices here often depend on the strategy you're trading. Below are the most important principles:

Entry methods:

• Direct entry: Enter directly when the setup has formed
• Pullback entry: Wait for a retest at the level and enter after the bounce

Which entry fits which strategy?

• Reversal: Pullback entry (wait for bounce from support/resistance)
• Breakout: Direct entry or pullback entry (depending on your risk tolerance)
• Scalping: Direct entry or manual entry (speed is crucial)

Stop loss

The placement of your stop loss is a challenge. You want the shortest possible stop loss for the largest possible risk-reward. But if you set the stop loss too short, you may get stopped out too often (just barely) and take many unnecessary losses. Where do you set that stop loss best?

1. Stop loss must be logical:
   • For long: stop loss below important support or below the last low
   • For short: stop loss above important resistance or above the last high
   • The stop loss must invalidate the trade if it's hit
   • Avoid round prices: A stop loss at $100.00 gets hit more often than $99.95
2. Stop loss per strategy:
   • Reversal: Stop loss just outside the support/resistance level
   • Breakout: Stop loss just outside the consolidation zone
   • Scalping: Very tight, from a few dollars to a few cents
3. Never increase your stop loss during the trade:
   • If your stop loss is hit, the trade was wrong
   • Only move your stop loss in the profitable direction (trailing stop)
   • Never move your stop loss further away to prevent loss
4. Stop loss must respect your risk-reward ratio:
   • If you risk $2, you must be able to win at least $4 (1:2 ratio)
   • If there's no 1:2 ratio possible, don't take the trade

Target / Take profit

The placement of your target, or TP, depends on your strategy and market conditions:

1. Target just before the next level:
   • For long: target just before important resistance
   • For short: target just before important support
   • Prices often react to levels, so take profit before the price reaches the level
   • Minimum 1:2 risk-reward ratio: If you risk $2, you must be able to win at least $4
2. Taking partials:
   • Target 1: First important level (take 50% profit and let 50% run)
   • Target 2: Next important level (close the remaining part of the trade)
   • This is called taking partials and helps you both take profit and give room for larger moves
3. When to adjust target:
   • If the price moves very strongly: consider extending the target
   • If important news is coming: take profit before the news
4. No target = trailing stop:
   • If you don't have a fixed target, use a trailing stop
   • This lets the price move but protects your profit
   • Trailing stop must be logical: for example behind the last closed candle or behind the 9EMA

In practice

1. Start with one strategy:

• Don't try to learn all strategies at once
• Focus on one strategy and become very good at it
• Once you're consistently profitable, you can add new strategies

2. Backtest your strategy:

• Test your strategy on historical data before trading with real money
• Keep track of how many trades are profitable
• Adjust your strategy based on results

3. Keep a trading journal:

• Log every trade, TradeLogger helps you perfectly with this
• Analyze what works and what doesn't
• Learn from your mistakes

4. Stay disciplined:

• Follow your rules, even when you're emotional
• If your strategy says "don't trade", don't trade
• One bad trade can undo weeks of good trades

5. Pay attention to market conditions:

• Not every strategy works in every market
• Reversals work better in ranges
• Breakouts work better in clear trends
• Scalping only works with high liquidity
• Adapt your strategy to market conditions

Next steps

Now that you know the basic strategies, it's time to practice. Start with paper trading (or demo account) and learn one strategy until you master it. In the next lessons, you'll learn about emotions and the importance of logging your trades.