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Intraday Trading Strategies : No 2 | Traffic Light strategy

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In this “Intraday trading strategies: No 2”, we will discuss Traffic light intraday strategy. This you can apply when you expect prices to move down or up based on price action.

Concept

  1. Every candlestick shows the fight between buyer and seller. Once the candle closes, its shape provide information who has won.
  2. Suppose you find a pair of Green and Red candle (Let us assume 5 min timeframe). This means that in first candle buyer dominated (Green candle) but in next candle sellers have tried to push the prices down (Red candle).
  3. The next candle (After you find the pair) will tell us who is dominating. If it breaks the high of both pair candle then buyer is more dominant, but if breaks the low then seller is more dominant.

Intraday Trading Strategies - Fig 1

I hope you understood the concept. Now let us move to rules of the strategy

Traffic Light Trading Strategy

SCALPING (1 min time frame)

Entry rule

Step 1: Ignore 1st candle (9:15 to 9:16)

Step 2: Find 1st pair of red and green candle (It can be green-red or red-green)

Step 3: Mark high and low of both the candles identified in Step 2. The length between the low and high is the RANGE of the pair

Step 4: You need to enter in the direction where any candle breaks the range marked in Step 3. If it breaks above then go long (Buy CE) but if it breaks the range down then go short (Buy PE)

Intraday Trading Strategies - Fig 2
Figure 1: This is the chart of Bank Nifty on 1 min timeframe. As per rules we will leave the first candle and then find 1st pair( Highlighted in grey box ). The low was broken and hence we will take PE trade. Chart source : Trading view

 

Intraday Trading Strategies - Fig 3
Figure 2: This is the chart of Bank Nifty on 1 min timeframe. As per rules we will leave the first candle and then find 1st pair( Highlighted in grey box ). Candle high was broken first, where CE trade will be executed with low of the range as Stop loss. In the 1st trade SL is hit. In 2nd trade as low was broken we will immediately execute the 2nd trade where target is achieved.

 

How to choose STRIKE PRICE?

For Smaller targets

It should be ATM ( At the money) or in the range of 200-300 Rs

For Bigger targets

It should be slightly OTM ( Out of the money) and in the range of 50-100 Rs

Stop loss

  1. Stop loss will be Range low/high. If you are taking CE then range low is SL and if you are taking PE then range high is SL.
  2. SL should not be more than 100 points on spot chart (Which means max should be 50Rs in ATM) . If its is more than 100 points , then you can ignore that pair of green and red candle and move to next pair
  3. Don’t take more than 3 trades in a day.

Important point : Don’t take more than 2 trades on a 1 min chart if your SL is hit 2 times . You can close trading for that day or switch to 5 mins time frame.

Exit rule

Take a risk reward of 2 or 3 . You can also exit at 50-100 Rs , because it is scalping so entry and exit has to be fast.

So these are the rules for entry , exit and stop loss if you are trading in 1 min timeframe. Now lets move to 5 min timeframe rules.

Intraday (5 mins time frame)

When you will use 5 min time frame (In intraday) for this strategy ?

  • If you are not comfortable using a 1 min time frame then you can use a 5 min time frame.
  • Two SLs are hit in a 1 min time frame and you want to take 1 more trade.

Entry rule

Note : In 5 min timeframe , we will NOT ignore the first candle like we did in 1 min timeframe.

Step 1 : Find 1st pair of red and green candle ( It can be green-red or red-green)

Step 2 : Mark high and low of both the candles identified in Step 2. The length between the low and high is the range of the pair

Step 3: You need to enter in the direction where any candle break the range marked in Step 3 . If it breaks above then go long (Buy CE ) but if it breaks the range down then go short ( Buy PE )

Intraday Trading Strategies - Fig 4
Figure 3: This is the chart of Bank Nifty on 5 min timeframe. As per rules we will consider first candle here and find 1st pair ( Highlighted in grey box ). Candle low was broken and our trade will get executed with range high as stop loss

 

Exit rule

Take risk reward of 2 or 3.

Stop Loss

  1. Stop loss will be Range low/high. If you are taking CE then range low is SL and if you are taking PE then range high is SL.
  2. SL should not be more than 100 points on spot chart (Which means max should be 50Rs in ATM) . If its is more than 100 points , then you can ignore that pair of green and red candle and move to next pair
  3. Don’t take more than 3 trades in a day.

 

What if you dont have time in the Morning ( Traders having 9-5 Job )

Check for traffic light setup after 1 PM ( You can consider 1PM candle) as there are chances of move in 2nd half also. The rules will remain the same in 1 min and 5 min timeframe.

Option Selling

All rules remain the same but switch the timeframe to 15 mins for option selling.

Backtesting

Always backtest the strategy before taking actual trades in market . The strategy should suit your trading style and psychology.

 

 

 

 

 

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