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Strategies

A strategy is a combination of patterns and chart conditions that determines whether and when you open a trade.

Now that you understand the core concepts and know how to read charts and place trades, it is time to learn trading strategies.

What is a strategy?

A trading strategy is a set of rules and guidelines that determines when to open a trade, where to place your stop loss, and when to close your trade. A good strategy helps you:

  • Avoid emotional decisions
  • Achieve consistent results
  • Control your risk
  • Learn from your trades

Without a clear strategy, trading is gambling. With a strategy, you make structured decisions based on objective criteria. Below is a detailed explanation of the two most common strategies.

Reversal strategy

A reversal strategy is based on the idea that after a strong move, price often returns to a previous level. You trade against the current intraday move, expecting price to reverse.

How does it work?

  • Price makes a strong move against the daily trend direction
  • You identify an important support or resistance level
  • You wait for price to reach that level and show a reversal signal
  • You enter expecting price to reverse

Concrete rules and guidelines:

  1. Trend identification:
    • First determine trend on a higher timeframe (1d = daily)
    • Reversal trades work best in a range/sideways market or aligned with daily trend
    • Avoid reversal trades against the daily trend
  2. Level selection:
    • Look for key levels where price may reverse (the more often a level is tested and respected, the stronger it is)
    • Yesterday high/low and round numbers can also be strong candidates
  3. Entry signals:
    • Setup should form close to the level
    • Wait for a bullish candlestick pattern at support (for example hammer, bullish engulfing)
    • Wait for a bearish candlestick pattern at resistance (for example shooting star, bearish engulfing)
    • Ending volume: ideally you see increased volume on the reversal candlestick
  4. Stop loss placement:
    • Long reversal: stop loss just below support
    • Short reversal: stop loss just above resistance
  5. Take profit placement:
    • Just before the next level or VWAP
    • Only take trades with at least a 1:2 risk-reward ratio between entry and target
    • Consider taking a partial and letting part of the trade run to a higher target
  6. When NOT to trade:
    • During major news events
    • In the first 10-15 minutes after market open
    • When higher-timeframe trend is very strong (in that case, look at breakout strategy instead)
    • With low volume during the reversal signal (no confirmation)

Breakout strategy

A breakout strategy (for longs) or breakdown strategy (for shorts) is based on the idea that when price breaks through a key level, a strong move often follows in the same direction.

How does it work?

  • Price consolidates around a support or resistance level
  • Price breaks through the level with increased volume
  • You trade in breakout direction, expecting continuation

Concrete rules and guidelines:

  1. Level identification:
    • Identify clear support or resistance levels
    • Trade breakouts only with the daily trend
  2. Breakout confirmation:
    • Breakout should be accompanied by increased momentum
    • Without additional volume, chance of a false breakout (fakeout) is high
    • The breakout candlestick should be strong (large body, small wicks)
    • Price should clearly break through the level, not just hover around it
  3. Entry:
    • Option 1 (safer): Wait for a pullback to the broken level (now flipped support/resistance) and enter on the break from there
    • Option 2 (more aggressive): Enter immediately when price breaks the level
    • Use a limit order where possible to reduce slippage
  4. Stop loss placement:
    • Long breakout: stop loss just below last low
    • Short breakdown: stop loss just above last high
    • Stop loss should be outside the consolidation zone
  5. Take profit placement:
    • Fixed TP: at least 2R and no further than just before next key level
    • Only take the trade if minimum risk-reward is 1:2
    • You can take partials and let part of the position run
    • You can also trail: move stop loss up/down under/above recently closed 2m or 5m candles until stopped out
  6. Watch out for false breakouts:
    • Low volume on breakout = likely false
    • Price breaks and returns immediately = false breakout
    • No follow-through after breakout = weak move
    • If you are in a false breakout, close quickly (your stop loss should handle this)
  7. When NOT to trade:
    • During major news events
    • With very low volume and/or momentum
    • When higher-timeframe trend is against breakout direction

Scalping

Scalping is a very short-term strategy where you aim for multiple small gains by entering and exiting quickly. Positions are often closed within minutes or even seconds. It requires strong market insight and experience, so it is less suitable for beginners.

How does it work?

  • You use very short timeframes (1m, 2m, or 5m)
  • You take many trades per day
  • Your goal is small, consistent profits
  • You exit quickly when the setup fails

Concrete rules and guidelines:

  1. Timeframe and market conditions:
    • Use 1m, 2m, or 5m timeframes
    • Scalp only in high-liquidity windows (first 2 hours after market open, last hour before close)
    • Avoid scalping during major news or low-volume periods
    • Focus on highly liquid stocks with tight spreads
  2. Setup identification:
    • Look for small consolidations or ranges
    • Wait for a clear breakout or reversal within the range
    • Use VWAP as an important reference
    • Price should be clearly above VWAP (long) or below VWAP (short)
  3. Entry:
    • Enter directly on signal
    • Wait for volume confirmation: a small volume spike at entry
    • Entry must be fast: if you wait too long, you miss the move
    • Use order book or order flow if available for precise entries
  4. Stop loss placement:
    • Stop loss is usually very tight: around 0.25-0.5% from entry price in liquid stocks
    • Stop loss should sit just outside recent high/low
    • If your stop loss is too wide, it is no longer scalping
  5. Take profit placement:
    • Target is often small: around 1:1 risk-reward
    • You can use multiple small targets (for example 0.5R, 1R, 1.5R)
    • Exit quickly when movement stalls
    • Use trailing stop for larger gains if momentum is strong
  6. Exit strategy:
    • Exit immediately if price moves against you without valid reason
    • Exit when volume disappears
    • Exit when target is reached
    • Exit when an opposite signal appears
    • Important: In scalping, speed is critical. If in doubt, exit
  7. Risk management:
    • Risk a maximum of 0.5-1% of account per trade
    • Maximum 2-3 open scalps at the same time
    • Stop scalping after 3-4 losses in a row
    • Track win/loss ratio: aim for at least 50% winning trades
  8. When NOT to scalp:
    • During major news events
    • In low-volume or low-liquidity conditions

Entry and exit strategies

Your entry strategy determines how and when you open a position. Your exit strategy determines how and when you close it. These choices are often linked to the strategy you trade. Here are the core principles:

Entry methods:

  • Direct entry: Enter immediately once setup is formed
  • Pullback entry: Wait for a retest of the level and enter after the bounce

Which entry fits which strategy?

  • Reversal: Pullback entry (wait for bounce from support/resistance)
  • Breakout: Direct entry or pullback entry (depends on risk tolerance)
  • Scalping: Direct/manual entry (speed is critical)

Stop loss

Stop-loss placement is a challenge. You want a tight stop loss for the best possible risk-reward. But if stop is too tight, you may get stopped out too often and take unnecessary losses. So where should you place it?

  1. Stop loss must be logical:
    • Long: stop loss below key support or below last low
    • Short: stop loss above key resistance or above last high
    • Stop loss should invalidate the trade if hit
    • Avoid round prices: a stop at $100.00 is hit more often than $99.95
  2. Stop loss by strategy:
    • Reversal: Stop loss just outside support/resistance
    • Breakout: Stop loss just outside consolidation zone
    • Scalping: Very tight, from a few dollars to a few cents
  3. Never widen stop loss during trade:
    • If stop loss is hit, setup was wrong
    • Only move stop in profitable direction (trailing stop)
    • Never move stop further away to avoid taking loss
  4. Stop loss must respect risk-reward:
    • If you risk $2, you should be able to make at least $4 (1:2 ratio)
    • If 1:2 is not possible, skip the trade

Target / Take profit

Target (TP) placement depends on strategy and market conditions:

  1. Target just before next key level:
    • Long: target just before major resistance
    • Short: target just before major support
    • Price often reacts at levels, so secure profits before level is reached
    • Minimum 1:2 risk-reward ratio: if you risk $2, target at least $4
  2. Taking partials:
    • Target 1: first key level (take 50% profit, let 50% run)
    • Target 2: next key level (close remaining position)
    • This helps secure profit while still allowing larger moves
  3. When to adjust target:
    • If price is moving very strongly: consider extending target
    • If major news is approaching: take profit before the event
  4. No fixed target = trailing stop:
    • If you do not use fixed target, use a trailing stop
    • This lets price run while protecting profit
    • Trailing stop should be logical: for example behind recently closed candle or behind 9EMA

In practice: how do you become profitable?

  1. Focus: Start with one strategy. Master breakouts or reversals before trying others.
  2. Backtesting: Test your rules on historical data first. Does it work over the last 100 trades?
  3. Journaling: Log every trade. Use Tradorade to discover which strategies actually make money and where emotional errors happen.
  4. Patience: If market does not meet your rules, do not trade. No trade is also a position. You protect your capital.

Next steps

Take your time practicing these core strategies. Start with papertrading (demo account) and stick to one strategy until you master it. On the next page, we turn a strategy into a full trade plan: The trade plan

Placing trades

The final step before getting started with trading is learning exactly how to place a trade.

The Trade Plan

A strategy tells you how the market works, but a trade plan tells you how YOU operate.