This is a scalping trade approach imparted by jjrvat on the Elite Trader forum. This is an approach and not a setup per se. You can define the setup yourself once you “get it”. This forum thread by jjrvat has influenced me deeply in understanding price action.
The basic idea here is to have a slow moving average to show the “macro” direction. Then, we use a smooth moving average to help define price waves. Once there are clear higher highs and higher lows (or lower lows and lower highs), enter the market on a pullback.
The following rules are not set in stone. Adapt them to your trading profile. As jjrvat pointed out, the exact parameters are secondary, consistency is the key.
Trading Rules – Jjrvat’s Price-based Trading
We are using a weighted moving average for the “macro” direction and the Hull moving average for showing waves. The Hull moving average is a smooth and wave-like moving average.
Learn about HMA from its inventor: Alan Hull
- 240-period weighted moving average (“WMA”) sloping up
- 21-period Hull moving average (“HMA”) to define waves; higher highs and higher lows
- On HMA pullback downwards, go long when price closes above HMA (pullback should not form lower low)
- 240-period WMA sloping down
- 21-period HMA to define waves; lower highs and lower lows
- On HMA pullback upwards, go short when price closes below HMA (pullback should not form higher high)
Winning Trade – Jjrvat’s Price-based Trading
This is a daily chart of Coamerica Incorporated listed on NYSE. The WMA and HMA change their colours according to their slopes. Here, the WMA was sloping downwards.
Using the waves highlighted by the HMA, we saw lower highs and lower lows, which indicates a downtrend. During the following pullback, we shorted as price closed below the HMA. The next wave gave solid profits.
The lower low formed a double bottom with a previous low around the blue horizontal line drawn. Despite an initial strong bull bar off that double bottom, the upwards momentum stalled and dojis developed. This is a bearish context.
Isn’t this a scalping setup? Why are we using it for day trading?
Jjrvat’s idea of a scalp is to capture a single price wave. This idea is equally applicable on all time frames.
Losing Trade – Jjrvat’s Price-based Trading
This is a daily chart of Kohl’s Corporation listed on NYSE. The red WMA highlighted the negative slope. The thick blue lines highlighted the lower highs and lower lows. During the following pullback, prices closed below the HMA and we shorted. After a short move downwards, prices reversed strongly into a bull trend.
It was easy to see why this trade failed. There were lower highs if we were trading the indicator: HMA. However, this is a price-based approach and the HMA only served to highlight, but not define, the waves.
Looking at the prices, the lower highs were barely perceptible. Hence, a trading range might be in place and the market structure supporting a downwards trend has changed.
Moreover, a strong bull bar after a down gap led to a double bottom (blue horizontal line). This showed a strong rejection by the double bottom support line.
Review – Jjrvat’s Price-based Approach
This is one of my favourite trading approach as every part of the setup focuses on price action.
One key principle jjrvat emphasized is the order of analysis. Look at the macro direction, followed by the waves, and finally the trigger. In other words, again, context is the key; figure out the context before even thinking of placing any trade.
You can vary the trade trigger (i.e. rule number 3) and it will work as long as the context is right. Far too many traders spend their entire trading career looking for the Holy Grail trigger without learning how to read the context.
There are two things to bear in mind when you use this trading approach.
First, you are trading price, and not indicators. Do not get lost following indicators like the losing example above.
Next, this is an approach and has many nuances when it comes to real trading. Read the original forum thread by jjrvat to understand these aspects before trying this approach.