Many traders tend to obsess over finding simple trading strategies that offer the lowest risk and highest reward possible.
I relate to this because I used to go through this type of thought process myself several years ago.
I was always thinking about ways to minimize my risk and increase my profit potential. But it’s not something that’s always easy to do.
However, one day I happened to stumble across a simple trading strategy that let me enter the market with low risk while also being able to profit substantially.
What I like most about this method is the strong momentum that follows after the entry signal is triggered.
How This Simple Trading Strategy Reduces Risk Substantially
This simple trading strategy is easy to find on an Open-High-Low-Close (OHLC) chart.
The first thing you need is a strong trend going either up or down.
Anyone who follows my tutorials or is enrolled in any of my trading courses already knows I’m a big fan of going with the current market trend.
You can see in the OHLC chart below how Jack in the Box Inc. (Nasdaq: JACK) is trending strongly upward.
You want to make sure to find good trending markets so the odds of getting stopped out are low while your profit potential is much higher.
The 2X Inside Day Strategy
Once we identify the trend, we need to find the actual setup…
The 2X Inside Day strategy is a cone-shaped pattern that has two inside days within each other.
The idea of this simple trading strategy is to find days within a trend when the market slows down and takes a breather from volatility.
This gives us the opportunity to enter during a quiet period before volatility picks up again.
I also consider the fact that no lower lows were made. And the fact that price action was able to stay inside the previous low tells me continued strength may be ahead.
You’ll see in this example below how each day’s high and low are inside the previous day’s trading range…
This is the type of setup you want to find when trading the 2X Inside Day strategy.
Notice how each succeeding day is inside the previous one.
Trading action gets tight, which lowers your risk level a lot when you enter setups with low volatility.
The entry is $0.05 above the price high that was made on day 3, and your stop-loss level is placed $0.10 below the third day’s low price.
The entry signal must be triggered on the fourth day.
If your buy stop does not get triggered on the fourth day, you must cancel your order.
Once the entry stop is triggered, place a stop-loss order below day three’s low right away.
The profit target for this simple trading strategy is set to four times your risk level.
In this particular case, the risk was only $0.55, so the profit target would be $2.20 added to your entry price.
You can see the entire sequence from entry to exit in this example…
Trades with risk of less than $1 that have four times profit potential are considered low-risk trading opportunities.
2X Inside Day Strategy Works to the Downside
This simple trading strategy works just as well to the downside as it does the upside.
You can see in this example how the stock broke the uptrend and is developing a good down trend…
This is a good example of the type of trading action you want to see before the trade sets up.
The beginning of a trend is a great place to enter because momentum usually rises as trends continue moving in the same direction.
Once you establish that the market or stock you’re trading is in a downtrend, you need to isolate the setup…
In this case, you’d look for two days below the high price of the previous day, and above the low price of the previous day.
Once you see the setup a few times, you’ll start noticing it over and over again when you scan charts.
You can see in this example exactly what the setup looks like…
Once you identify and isolate the setup, you can place your sell-stop entry order $0.05 below the low made on day 3.
And once you get filled, you should place your stop-loss order $0.15 above the high that was reached on day 3.
The example below demonstrates exactly where the protective stop loss and the entry sell-stop levels go…
You can see the entire sequence on a daily chart, which may give you a slightly different perspective on the setup and the entire trade sequence.
The key to this simple trading strategy is isolating patterns where your risk is limited.
The risk for each of these two examples was less than $1. This is a great risk for a trade that can yield anywhere from $2 to $4 in profit.
For more on this topic, please go to: The Best Short-Term Trading Strategy for Beginners and It’s Not Difficult to Learn Technical Analysis Strategies.
I hope this helps!
Senior Strategist, WealthPress