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Strong

A Simple Strategy for Day Trading

Today I'd like to welcome Markus Heitkoetter from Rockwelltrading.com. Markus' article below dives into what most traders just don't get. Enjoy the article, comment below, and visit Rockwelltrading.com to see what Markus's next webinar event is.

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With dozens of indicators, hundreds of chart patterns, and thousands of combination's between the two, it’s no wonder that many traders struggle to find and enter trades with confidence. “Analysis paralysis” is a common problem for many traders, and it can even keep experienced traders from taking good trades. It’s easy to plot a dozen indicators on your chart, but what are they really telling you? Are you able to make split second decisions when there is an opportunity in the market? If not, it’s probably time to simplify your trading.

One of the easiest ways I’ve found to keep things simple, and avoid being a victim of "analysis paralysis", is to use a strategy that I call, "The Simple Strategy".

This strategy is a trend following strategy that identifies entries in trending markets. Although this strategy should work in any market, as a day trader I prefer to trade the futures markets. My markets of choice are:

  • E-mini S&P 500
  • E-mini Dow
    • Euro FX
    • 30 Year T-Bonds

    The Simple Strategy is based on 2 popular indicators: MACD & Bollinger Bands. Using MACD, I rely on the following standard settings to identify the trend of the market:

    • 26 for the slow moving average
    • 12 for the fast moving average
    • 9 for the moving average of MACD (known as the “trigger” or “signal” line)

    MACD is a very powerful indicator. To confirm strong trends in a market, I look for the following conditions:

    • An uptrend is present if MACD is above its signal line AND above the zero line.
    • A downtrend is present if MACD is below its signal line AND below the zero line.

    By waiting for MACD to be above or below the zero line, we can avoid being whipsawed when a market isn’t in a clear trend.

    MACD helps us identify the direction of the market, but our actual entry point is going to be based on Bollinger Bands. The Simple Strategy uses the following Bollinger Band settings:

    • 12 for the moving average
    • 2 for the standard deviation

    When price tags an upper or lower Bollinger Band, we usually see a continuation of a trend. Using MACD to identify the direction of the market, we look for entries when price is tagging or pushing through a Bollinger Band. This gives us the following entry rules:

    • Long entry with a buy stop order at the value of the upper Bollinger Band, if the market is in an uptrend based on MACD.
    • Short entry with a sell stop order at the value of the Lower Bollinger Band, if the market is in a downtrend based on MACD.

    With stop orders at the value of the Bollinger Band we will ONLY be triggered if price pushes through the Bollinger Band. Using Bollinger Bands as our entry point we can stay out of markets that are ranging from upper to lower band, and avoid many “false signals”.

    Now that we have our entry rules down, we need to know when to get out of a trade. Our Simple Strategy uses volatility-based exits by keeping track of the Average Daily Range. Our goal is to accommodate different market conditions by using stop losses and profit targets that adjust to the ranges of the market we are trading.
    The Average Daily Range (ADR) is simple to calculate. To calculate ADR on your own, find the average range (difference between session high and session low) over the last 7 days (total range for 7 days divided by 7).

    Once we have the ADR we can calculate our stop loss and profit target.
    •    Stop Loss = 10% of the ADR
    •    Profit Target = 15% of the ADR

    If we’re trading the E-mini S&P 500 and the ADR was 20, our stop loss would be 2 points (20x.10) and our profit target would be 3 points (20x.15). Although there will be times when the market continues to trend, I personally always use set exits so I can take profits before the market goes against me. In addition to an ADR stop loss and profit target, I want to get out of a trade when the market is no longer trending. An easy way to determine when the market is no longer trending is to go back to the MACD indicator. When MACD crosses back below the trigger line in an uptrend, or back above the trigger line in a downtrend, I’ll go ahead and exit a Simple Strategy trade.

    The Simple Strategy can be traded on any intraday timeframe. Traders that I work with have shared decent results on 5 minute and 15 minute charts, but my preference isn’t a timeframe at all. Instead I use range bars.
    The Simple Strategy is an easy strategy to understand and execute. Once you know the basics, consider adjustments depending on your trading personality and experience; like scaling in and out, using trailing stops, and by using Pivot Points for support and resistance.

    If you are interested in learning more about the day trading strategies we use at Rockwell Trading, I’d like to invite you to an exclusive webinar available only for INO traders:

    Rockwelltrading.com webinar

    All the best in your trading.
    Markus Heitkoetter, CEO Rockwell Trading

    Markus is a professional day trading coach and author of the international bestseller “The Complete Guide to Day Trading”.

    Comments

    1. Frits Altenburg says:

      It's amazing how one speaker can fool complete tribes. The most basic idea of tech analysis, a trend line already fails to make sense! Plot a trendline in a 2min, a 15min and a 60min barchart... Lines wihtin lines within lines LMAO!! Place the same bollinger bands in a 10min bar chart and a range bar chart. I'm not even talking about different time frames or break out ranges, but they already give you a complete different view!! Besides that, technical indicators tell you something about price development in the PAST!! "Damn... If I had known that 5mins ago the market had gone up I would have entered long"... Yup.

    2. Frits Altenburg says:

      It's amazing how one speaker can fool complete tribes. The most basic idea of tech analysis, a trend line already fails to make sense! Plot a trendline in a 2min, a 15min and a 60min barchart... Lines wihtin lines within lines LMAO!! Place the same bollinger bands in a 10min bar chart and a range bar chart. I'm not even talking about different time frames or break out ranges, but they already give you a complete different view!! Besides that, technical indicators tell you something about price development in the PAST!! "Damn... If I had known that 5mins ago the market had gone up I would have entered long"... Yup.

      Nevertheless it seems to be common practice for the blogger himself to fool people as I have experienced myself. I've been with rockwell for 12 months. Search youtube -rockwell trading - and I'm sure that within the first ten results you'll find a live recording of me posting the truth in their NOT live trading support room. Underneath the vdo is a link to an article that describes my twelve month experience with them.

      Trade well!

    3. Sara says:

      You are performing a fantastic service to your visitors by opening up the comments area, it's a sensible way to communicate with them. There are numerous resources here and we appreciate you being so kind to publish them.

    4. Quite a simple strategy. Bollinger bonds is an underestimated or less used tool by many traders.

    5. Jiri says:

      Hi Marcus,
      Thanks for posting an article with simple and elegant system. Those like this are probably the best working ones 🙂
      Please do you actually trade this? How looked like back tests of this strategy on ES and YM? What range for range bars are you using (or timeframe in case of time based graphs)?
      1) Do you have some confirming nuances you are looking at (or considering them) when price touches Bollie? So that you can increase the probability that it is trend continuation situation versus trend reversal situation.
      2) How looks like your equity curve with this system? Especially, what is/was max drawdown, win ratio (you have very small RRR), average number of trades per day and average size of trade.
      Bottom line - I really appreciate that you brought up the idea to use Bollie as continuation signal. I never looked at them like that though I noticed that heavily trending equities can run on Bollie edge for number of days.
      Thanks a lot in advance, Jiri

    6. Me says:

      Thanks Justin much appreciated. I too am a rookie and have been looking at 15,5 and 1 minute charts waiting for all to confirm before entering. Just wasn't sure if this was correct.

    7. Justin says:

      I actually have a good answer to this! I'm a rookie but I obsessed with learning timing and here's what I found.

      The idea is to follow the trend (trend is your friend), so you want to pick 2 timeframes, 3 at the most and make sure there is enough of a time between the two to get the bigger picture before jumping into a trade. Anyone who trades off one chart alone is doomed to fail. But if you know the general direction, you can use a shorter time frame to time your entry.

      Here's a few examples.

      1 minute, 5 minutes, 30 minutes
      5 minutes, 30 minutes, 1 hour
      15 min, 1 hour, 4 hours
      1 hour, 4 hours, 1 day.

      Say you use the 1 hour, 4 hours and 1 day timeframe. You would first want to look at the daily to see the trend (or use the trade triangles if you're a MarketClub member) and then use either the 4 hour or 1 hour chart to find a good entry point.

      Hope that helps.

      Justin

    8. Me says:

      One thing that confuses me is the indicators and time frames. If I look at the MACD over a 15 minute chart it may be below the zero line and below the trigger line but when looking at a 5 or 1 minute chart I find the opposite. How does one account for this? Do you only take action when you have the market moving in your direction on the 1,5 and 15 minute charts or how do you go about it? Thanks

    9. Bill says:

      You mention about and uptrend if the MACD is above its signal line and the zero line. And a downtrend if the MACD is below the signal line and below the zero line. Now my question is that 3 tabs that are on the bottom right side of the MACD chart I am using ninja trader
      Thank You
      Bill

    10. Justin says:

      From what I have learned, all indicators adjust to the selected timeframe. So the reading will be different but equally relevant to you in your short-term trading as it would be if you used a daily timeframe.

    11. Bill says:

      I am new to the MACD indicator I am been following it for about 2 weeks now but my question. I am trying to understand what color is what? that is 12,26,9 Its it okay to use a 1 minute time frame I trade the minigold market.
      The information is very helpful.
      Thank You
      Bill

    12. Westerngal says:

      Hi Markus,

      Thank you so much for these great tips!!! I use MACD myself for timing entry and exit points for trades - I also use Stochastics, RSI, and Keltner channels rather than Bollinger bands. I've found Keltner channels to work better for entry and exit points. I would love though to hear your comments on using Keltner channels - what you think of them, if you ever use them, and if not, why you prefer Bollinger bands over the channels.

      Thank you Markus!!

      Westerngal

    13. Me says:

      Hi Markus. Thanks for the article. Tell me does this strategy work in Forex trading that you've found?

      • Markus Heitkoetter says:

        Although I prefer to trade futures, and trade Euro FX and Pound FX futures contracts instead of Forex, I've had quite a few Forex traders use these concepts with success. I'd stick to the main pairs but you'll probably find the transition to Forex pretty seamless.

        Markus

    14. Laura says:

      Could someone recommend a broker suitable for day trading? Mine is making changes which make futures day trading more and more challenging...

    15. Doctor Stock says:

      I'm curious to see what 'hooks' come along with the presentation... hopefully none. Thanks! Looking forward to the information.

      • Markus Heitkoetter says:

        Hi Doctor Stock,

        An educator with a hook? C'mon. 🙂 Like INO, we pride ourselves in providing quality education for our traders. We know that not all traders are alike and we use our webinars to introduce ideas and methods that might help traders that are struggling, or just looking for new trading ideas to incorporate into their trading plan.

        In this upcoming webinar we will share strategies we use at Rockwell Trading for day trading. You can take these strategies and see if they work for you and your trading style...no hook there. 😉 Now some traders decide that they want to know more about the methods we use, or need extra guidance because the concepts are new to them. For these traders we usually offer a webinar special on related products. Fair enough? 🙂

        Happy Trading!
        Markus

    16. Al says:

      " With regard to timing, if we are in an uptrend, are you saying we buy (enter) a long position when the price is near the upper or lower Bollinger Band? And vise vera for a downtrend? "

      Above query extracted from comment by Justin earlier. I would like also to know the answer. Please comment.
      Thanks,
      Al

      • Markus Heitkoetter says:

        Hi Al,

        Let's take the Bollinger Band concept one step further and then answer your question...Bollinger Bands are a visual representation of market volatility. When markets are volatile, bands are wide and far apart. When markets are less volatile, bands are narrow and close together. Many traders will attempt to "fade" Bollinger Bands by selling the upper band and buying the lower band. This might work well in sideways markets, but it can be a painful experience in trending markets.

        The Simple Strategy is a trend FOLLOWING strategy so the key is to use the strategy in a trending market. This is why we use MACD to determine the trend and use orders that are triggered WHEN a band is hit (a market order could be used if a bar completes outside of the band).

        If you look at a chart with Bollinger Bands you'll typically find that when price tags or pushes through the Bollinger Band, this is a continuation of the trend, especially when confirmed by MACD. This is why we want to enter at the bands with a stop order (triggered when hit), and avoid entries if the market doesn't push through the band (no fill if price is not hit).

        So to answer your question I would place a buy stop order at the Upper Band when MACD is confiming an uptrend, or a sell stop order at the Lower Band when MACD is confirming an uptrend. I will adjust orders if we are still in a trend but the upper or lower band value has changed, or cancel orders if we no longer have a trending market.

        Happy Trading!
        Markus

    17. Arvind says:

      Hi MarKus

      This is very informative - a high quality stuff. I very much appreciate and found helpful to grow my learning to trade.

      Could you please tell me wether ADR you refer is the ATR?

      • Justin says:

        Yeah, ATR seems like a nice way to manage these positions. I'd appreciate any feedback you have regarding the use of ATR.

        Justin

      • Hi Arvind,

        The ATR (Average TRUE Range) is a slightly more complex calculation that is meant to account for gaps and possible limit moves in commodities. I've found that the ADR (Average DAILY Range) is easier to calculate and more effective for the way I trade electronic markets.

        Happy Trading!
        Markus

    18. Dan says:

      Thank You! Thank You! Thank You! This is just what I have been looking for. I am looking forward to your Webinar.

    19. Jerry says:

      I use Etrade and when using the MACD it does not allow us to see the 'time' of the moving averages. The settings allow us to change the settings. Standard settings on Etrade on the MACD are slow smoothing 0.039, fast smoothing 0.15 and the signal as 0.2 smoothing. Can someone share what these settings need to be to get the moving averages as suggested.

      Thank you

    20. Patrick ODay says:

      Thank-you Adam for Mark's Guest Blog. It is very informative and shows the quality of your own "Market Club" site. I am not a subsciber but soon will be. Thank you for your integrity, it shows even through your guests. Had a 70% draw down in 2008 and 2009 through my own ignorance, even though subscribed to two other financial sites. A little knowledge is a dangerous thing, especially when it is used by the uninformed !..... 🙂 Patrick

    21. Justin says:

      Great article, thank you for the advice!

      I'm a little confused with one thing though. When its time to determine our entry and you say...

      "Long entry with a buy stop order at the value of the upper Bollinger Band, if the market is in an uptrend based on MACD."

      I understand stop loss and limit orders but I'm not sure what you mean by this. With regard to timing, if we are in an uptrend, are you saying we buy (enter) a long position when the price is near the upper or lower Bollinger Band? And vise vera for a downtrend?

      Thanks Again,

      Justin

      • Hi Justin,

        A stop order is often used as a STOP LOSS to exit a trade for protection, but it can also be used as an ENTRY order. Think of it this way, if you are in a trade and you want to use a stop order for protection, you place a stop order at a specified price. When this price is hit, your stop order simply becomes a market order to close your trade. So although a stop order is often used to close a trade, it is just an order that gets "triggered" at a specified price, turning into a market order once triggered.

        If you are not in a position you can still use a stop order, and it will become a market order once your price has been hit. This market order will now get you IN to a trade.

        So if you place a BUY STOP order ABOVE the current market price, it will be triggered and become a market order if the market moves higher. If the market does not move high enough to trigger your stop price, you will not get into the trade.

        The same goes for a move lower. Does this make sense?

        Markus

        • Justin says:

          Yes, that clears it up. Thanks for answering my question.

          One last question, given your experience with this approach, do you think setting stop-loss and limits using Average True Range could also work?

          If so, using your strategy for forex, do you have a suggested timeframe (setting) for the ATR?

          Thanks Again!

          Justin

    22. George says:

      Excellent information to combine with the triangles.
      Thank you

    23. Me says:

      Excuse my ignorance firstly. Thanks for the post, very informative. I understand everything mentioned but am unsure as to what "range bars" are and how one would implement such a strategy using said "range bars"
      Thanks

      • Range Bars are a great way to incorporate volatility into your bars as a day trader. With a range bar, a new bar begins AFTER a "specified" range has been traded. In the E-Mini S&P 500 we use an 8 tick range bar so a new bar begins every time the market moves 9 ticks (the 9th tick begins a NEW 8 tick range).

        It's a fascinating concept and if it's new to you, I'd highly encourage you to attend our webinar since it's sometimes easier to see hands on examples.

        Markus

    24. Foxy says:

      Using MACD, I rely on the following standard settings to identify the trend of the market:

      ■26 for the slow moving average
      ■12 for the fast moving average
      ■9 for the moving average of MACD (known as the “trigger” or “signal” line)
      MACD is a very powerful indicator. To confirm strong trends in a market, I look for the following conditions:

      ■An uptrend is present if MACD is above its signal line AND above the zero line.
      ■A downtrend is present if MACD is below its signal line AND below the zero line.
      How can this be understood clearly if the 9 MACD is the signal line?

      • Hi Foxy,

        The key is to watch MACD, the 9EMA of MACD, and the zeroline. If you are watching MACD, look for MACD to cross above the 9 MACD EMA, and look for the MACD line to be above the zero-line for a possible LONG signal. The opposite would be true for a short signal. Does this make sense?

        Markus

      • Justin says:

        For MarketClub....

        The MACD is the blue line and the signal line is red.

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