I came up with this strategy because sometimes I would miss an entry to a big move. It is frustrating to watch the market move away from you without you being "on board". I have discovered that during a big move, the market will pause for a bar or two. Identifying that pause and putting some basic rules around that pause is the basic concept around the "bobber strategy". Here are the basic rules:
1. The market has to be trending. That is defined as 3 or more bars in the same direction (up or down) with out the previous bar High/Low being taken out. Using candlestick charts, the trend is obvious. Red bars in a down trend and green bars in an up trend
I would also continue to define a trend in relationship to where the price is in comparison to the 56 EMA. If the price is above the 56 EMA, the market is generally in an uptrend, below the 56 EMA, the market is in a downtrend. I also get the question regarding why I use the 56 EMA. Many traders use the 5 minute chart to make their trade decisions on. They also use the 34 EMA as the major trendline they follow. After many years of study, I decided that it would not be in my best interest to trade against those traders. Since my strategies work best on the 3 minute chart, I decided to find the moving average that approximated the 34 EMA on the 5 minute chart. My research has shown that moving average to be the 56 EMA on the 3 minute chart.
2. Once the trend is established, you look for 1 or 2 bars that are trying to move in the opposite direction of the trend. Candlestick charts usually show these to be different colored bars. In a down trend, the bars change from red to green, in an uptrend, the bars turn from green to red.
3. Entry is one tick below the lowest green bar with a stop just above entry bar, maximum stop is 2 points. Objective is 2 points.
This strategy allows you to enter a bigger move knowing that the potential for a continuation of the move is great. Proper money management (stops in place per the strategy) will protect you in case the market has other ideas.
Before you start thinking that this simple strategy is too simple and doesn't work, last week (Jan 22-Jan 25, 4 trading day because of the MLK holiday) there were 7 bobber set-ups with 7 winning trades, 0 breakeven trades and 0 losing trades for a net profit of before slippage, or commission.
I recently got the following question: Ron, is there any scenario that you would take a LONG bobber trade below the 56 EMA or a SHORT bobber trade above the 56 EMA? The answer is yes, but requires a different set of rules. I will go over them briefly. As I stated above, trading with the trend is ALWAYS a safer trade involving much less risk. But if the market is at some type of support/resistance level AND there is a trendline break, then it is ok to take a bobber set-up trade. Let me describe the areas of support/resistance that make the trade ok to take.
First, a double bottom/top (meaning the market is testing a recent market low/high and bounces off of that level, the a bobber set-up after a trendline break would be valid. Other areas of strong support/resistance would include reaching at 127% or 161% fibonicci level. Those levels are very strong areas of support/resistance. The question that you have to answer is: if the market is at a double bottom, will it hold there? of will it move to the 127% fib level or to the 161% fib level. It is for these reason that I choose to stick with trend trades. The decision to take a trade depends on your trading style, personality, and willingness to risk with your hard earned money.