Backtested entry and exit strategy.
Originally posted on lifestylemaniacs.com
So you decided to give trading a shot. You probably learned the basics; if not, I encourage you to watch some YouTube videos, take some courses, or read a book on this topic. I left some useful links as you can see.
I watched YouTube videos and followed the course above, and there is a lot of information that overwelled me. After 3 years of trial and error, I finally found a minimalistic chart layout and trading strategy that brought me consistent rewards.
I backtested this layout and strategy on multiple markets (individual stocks, ETFs, commodities, crypto, forex), and I always got an average win to loss ratio of 2. This means I had at least 2x more wins compared to losses.
Before we dive into the tools, we first need to make some considerations:
1-Day Heikin Ashi Chart
We will always use the 1D Heikin Ashi chart. We will never bother checking 1-Hour or 1-Minute charts, nor regular candlestick charts as they are filled with noise and they are hard to interpret.
I found the 1D Heikin Ashi chart is the most accurate and granular at the same time trading chart.
Buy: green Heikin Ashi candle without a bottom wick
Sell: red Heikin Ashi candle without a top wick
We will focus on short/medium-term investing because we will see corrections along the way. For instance, although we are in a bull market, we may see a downtrend last for a month. It is crucial to be patient and stick to the plan during these times.
Fundamental analysis (e.g. cash flow, news, hype, underlying value) will always beat technical analysis. This is why before investing, we also understand the underlying value of the asset, if any.
We also try to understand the market cycles, read the weekly news, and analyze the current economic status.
When using technical analysis, we are using probabilities, not something 100% accurate.
There is and will never be a technical analysis indicator or combination of indicators that will indicate a 100% successful trade.
What we are trying to achieve is a higher probability that our trade (long or short) will be successful.
Now that we cleared this up, let’s see the technical indicators.
The 20, 50, and 200 EMAs (Exponential Moving Averages) are the top indicators to determine the long-term trend: bullish or bearish. If we don’t know the trend, we can’t know if it’s the time to buy or sell.
Bull trend: the 20 and 50 period EMAs cross above the 200 EMA
Bear trend: the 20 and 50 period EMAs cross below the 200 EMA
Now that we have this information, let’s see how to apply it. Knowledge is not power until applied.
We enter long only after the 50-period EMA crossed above the 200-period EMA, and after the 20-period EMA crossed above the 50-period EMA.
Also, we need to wait and see that we have at least 2 ascending green candlesticks, without bottom wick, and above the 20-period EMA.
For short signals, the same algorithm, but reversed: 50-period EMA crossed below the 200-period EMA, the 20-period EMA crossed below the 50-period EMA, at least 2 descending red candlesticks, without top wick, and below the 20-period EMA.
We exit a long entry when a red candlestick closes below the 200-period EMA. In analogy, we exit a short entry when a green candlestick closes above the 200-period EMA.
Let’s see some examples:
BTCUSD 1D Heikin Ashi in Trading View with 20/50/200 EMAsAAPL 1D Heikin Ashi in Trading View with 20/50/200 EMAsQQQ 1D Heikin Ashi in Trading View with 20/50/200 EMAsVOO 1D Heikin Ashi in Trading View with 20/50/200 EMAsGOLD 1D Heikin Ashi in Trading View with 20/50/200 EMAsEURUSD 1D Heikin Ashi in Trading View with 20/50/200 EMAs
As you can see, I chose different assets just to prove to you that the strategy applies to different markets: stocks, ETFs, crypto, forex, and commodities. The assets were chosen randomly, so I don’t invite you to invest in any of them.
In every screenshot, I included the average winning to losing trades ratio so you can see we have more than 2 times more winning compared to losing trades (ratio > 2).
Disclaimer: I am not a financial adviser and don’t recommend investing in anything as nothing is guaranteed. Everything I write on the topic is for informational and educational purposes only. Always do your research.