This trend-following trading system is designed specifically for Broadcom Inc. (AVGO) stock on the M15 timeframe, utilizing pullbacks for entry points. The system combines the Relative Strength Index (RSI) with a period of 5 (calculated based on closing prices) and the Exponential Moving Average (EMA) with a period of 80 to help identify trend direction and optimal entry points.
- Buy position: A buy position is opened when the price is above the 80-period EMA, and the RSI indicator crosses the 50 level from below. This indicates a potential resumption of an upward trend following a temporary pullback.
- Sell position: A sell position is opened when the price is below the 80-period EMA, and the RSI crosses the 50 level from above, signaling the resumption of a downward trend after a retracement.
- Stop Loss and Take Profit: For buy trades, a Stop Loss is set at 0.9% from the entry point, and the Take Profit is set at 2.5%. For sell trades, the Stop Loss is also 0.9%, but the Take Profit is slightly lower at 1.5%. This asymmetric risk-reward setup is designed to capture quick profits while maintaining tight risk control.
- Position limits: The strategy limits the number of open positions to a maximum of two at any given time, ensuring disciplined risk management and avoiding overexposure to the market.
Why this strategy can be effective:
This strategy combines two reliable technical analysis tools — RSI and EMA — providing a balanced approach to both trend identification and optimal entry points during price corrections. Here are a few reasons why this strategy has a sound basis:
- EMA as a trend filter: The 80-period EMA serves as a dynamic trend filter. By ensuring buy signals are only triggered when the price is above the EMA and sell signals when the price is below, the strategy avoids counter-trend trading. This allows traders to ride the trend in the direction of the prevailing market movement, increasing the likelihood of success.
- RSI as a momentum indicator: The RSI with a period of 5 is used to spot momentum shifts during short-term pullbacks. The crossing of the 50 level on the RSI often signals a shift in market sentiment. By combining this with the EMA, the strategy ensures that traders only enter trades when the price action and momentum are aligned.
- Risk management: The tight 0.9% Stop Loss ensures that losses are kept minimal, while the 2.5% Take Profit for buy trades and 1.5% for sell trades offer an attractive risk-reward ratio. This disciplined approach helps to limit downside risk while aiming for consistent profits. The slightly larger Take Profit on buy trades reflects the general upward trend in the stock market over time.
- Focus on pullbacks: By entering trades on pullbacks, this strategy aims to capture the continuation of a trend after a temporary price correction. Pullback trading is a popular method because it allows traders to enter a trend at a more favorable price, maximizing potential profit.
- Broadcom inc. (AVGO): This strategy is tailored specifically for Broadcom (AVGO), a stock known for its liquidity and volatility, making it an ideal candidate for trend-following systems on shorter timeframes like M15.