Everyone likes to have fun with hypothetical “Desert Island” questions. Do you know those where you sit with your friends and ask each other what you would take with you or who you might take with you if you had only ONE choice and would have to be banished to an uninhabited / lonely island of your life for the rest?
In today's lesson, I wanted to have a bit of fun, but also talk to you about what I would take with me if I could only choose ONE trading approach for the rest of my life. If I were to go to a desert island (which has an excellent internet connection, lol), these are the trading tools I would take with me …
This is how I would enter the market …
If I only had to look for ONE price action pattern to enter the market, it would be a very obvious and powerful pattern that once you understand it is hard to miss …
What I would look for is a pin header or a tail bar, ideally a long tail pin header. These are patterns with an obviously long tail (or shadow). It doesn't necessarily have to be a "pin header", although it is better if it does, but a simple tail header that is properly arranged also works.
Let's look at a few examples that I look for every day on the market in relation to breech bars and pin bar reversals:
Here is an example of a long tail pin bar (sell signal) in a downtrend market:
Here's another example of a long-tailed header. This time it is a bullish long tail pin strip (buy signal) that has formed at an important support level in the market:
As we can see in the next example, with pin bars we can often easily see entries in powerful trends. In fact, a pin header after pulling back within a trend is probably my preferred setup for price promotions:
Next, let's look at a tail rod. A bar that is not entirely a “pin bar”, but still essentially represents and implies the same thing. The main difference is that the body (distance between opening and closing) of the rod is not quite as small in relation to the total length of the rod as that of a pin rod:
From the examples above, it should be clear what I would be looking for if I could only select ONE input signal for the rest of my life. It should also be clear WHY I would choose pens / tailpoles; They convey a very important message about what will happen next in the market in a very clear and powerful way.
A more detailed tutorial on Tailed Bars can be found in my Tailed Bar Trading Tutorial
For a more detailed tutorial on pin bars, see my tutorial on trading pin bars
It is always amusing to me that most beginners seem to be almost exclusively concerned with their trading entries, although the most important part of trading is money management. Money is earned or lost depending on how well you manage your trades and money, rather than how well you enter the market (although entries play an important role).
Without a money management plan, no entry strategy or trading method would be complete. The most important aspects of money management for a trader are position determination and risk reward. These are the money management components that I would worry about in my “lonely island” approach.
When I talk about sizing positions, I am referring to the number of lots (in forex) or the trading volume / number of contracts / stocks (stocks) etc. We are talking about the SIZE of the position with which you trade. Why is that so important? Well, because it determines how much money you have endangered; The bigger the position, the more money you risk. The other reason why this is so important is that properly adjusting your position size to maintain your overall 1R risk per trade is critical to long-term trading success.
For more information on position sizing, see my position sizing lesson.
Risk return is the other important component of money management. This refers to finding the risk of a trade compared to its potential reward that you would normally want to see at 1 or 2 or more (reward at 2 times the risk). It is important to consider the potential risk / return of a trade before entering it as the question of whether a good risk / reward can be achieved may or may not affect your decision to trade.
In the following example, note that the risk is 1R, where R = the dollar amount you risk trading. In this case, the risk is the distance from the entrance (pin bar low) to the stop loss (near pin high) and the reward is set at 2R or 2 times the risk. It is important that you try to get a reward that is at least twice your risk so that you can take advantage of the winners if they come along. So they're big enough to make up for your losers and still bring you a profit.
In the following example we can see what it looks like to represent the potential risk return of a pin bar trade. Note that I have customized the MetaTrader 4 Fibonacci tool so that risk and reward are shown with every trade setup. I described how to do this in an article on the risk-reward tool. Check out this to learn more. Note that this pin bar signal triggers a potential 5R winner …
Daily time frames and low frequency
A trading strategy would not be complete without something that holds it overall, the X-Factor, so to speak. For me, this means trading daily chart timeframes in a low frequency trading approach.
This type of trading essentially means that we focus on the daily charts and don't want to trade often. Instead, we're looking for quality setups (which are fairly rare). This increases our potential win rate per trade, giving us a better chance of making money in the long run. This also enables us to keep our emotions in check more easily and largely exclude the potential for over-negotiation. This is usually the number one that destroys merchant accounts.
In the following example, note the pin bar entry signals that have formed at an important support level. I really want you to notice that this was the daily chart (like all the other charts in this lesson and most of my lessons). If I were stranded on a desert island, I could enter this trade for a long time and let it run for 1-2 weeks and spend that time… building protection and gathering food… and returning to a huge profit. Perhaps a bit too hypothetical for an example (what would you do with money stranded on an island? Pay pirates to maybe save you ?!), but the point is still valid – end-of-day trading allows you Reducing your time expenditure and helping to suppress / tame your emotional reactions to the market so that you have a better chance of long-term trading success. It is a win-win situation!
If I were stranded on a desert island and could only use one trade approach, this would be:
- Pin bars / tail bars
- Money management
- Daily charts / end of day approach
It's really as simple as the three-point plan outlined above, so stop complicating it.
You can find more information on daily chart and end-of-day trading in the following tutorials:
How to trade trading strategies at the end of the day
Daily tutorial on trading chart timeframes
While today's lesson dealt with a hypothetical situation of being forced to choose a trading strategy to take to a lonely island for the rest of your life, the wisdom and strategies discussed are not hypothetical at all.
The strategies I discussed above are how I trade 90% of the time in my daily trading. The concepts are transferable to all types of markets, from forex to futures, stocks and everywhere in between. They are best suited for the 1 hour and higher timeframe, but as mentioned earlier, I prefer the timeframe of the daily chart to everyone else. No matter where you land on an island or a trade counter, keep in mind that the concepts discussed here, which have been extended in my course through advanced price promotions, have stood the test of time and will not only serve you well survival … but in be successful in all trading environments.
What do you think about this lesson? Please share your feedback in the comments below!