First of all The “Holy Grail” trade was originally described in Linda Bradford Raschke’s Street Smarts book.
I get questions all the time about the Holy Grail Setup: Well here it is explained and i'll walk you thru it step by step.
I want to let you know that this setup is VERY Easy and Simple and it is very spottable and occurs very often especially during trending markets, UP or DOWN. Also, if you master this pattern, i am confident, that'll you'll be able to pull money out of the market a lot more often.
Tools You will Need to Day Trade the Holy Grail Setup:
1. A 5 minute chart
2. Volume
3. The 20 Bar Simple Moving Average(SMA or EMA)
4. Basic pattern recognition skills (i.e. BULL FLAGS, triangles, pennants, Bear flags, etc)
5. An ego that handle a small loss from time to time :-)
First:
You need to spot a trend in a stock (i like to use the 5 minute bars, ten minute bars work really well too). A trend should be either UP or DOWN and you can see that just by eye balling the direction of the price trend after the first hour of trading.
Second:
You want to look at volume to see the conviction of the move. Lots of volume during the first hour will tell you the force of the move UP or DOWN. Tells me how reliable the move is and the conviction of traders.
Third:
Now, this is the most important part of the setup and this is where this setup becomes an art and moving away from the 'science' of trading. This will test your eye balling skills, pattern recognition skills and trading prowess.
You wanna see a slow and corrective retrace back to test the 20 bar simple moving average(20 SMA). You wanna see a hammer off that 20MA, a pattern like a triangle, a wedge or a coiling symmetrical triangle, NR7s, a consolidation move of some kind. The operating words here are: slow and corrective retrace to test the 20 SMA.
Really strongly trending stocks will not pullback for long, so you need to be aware of that and be on the lookout for that scenario and that'll tell you what kind of demand/supply you are dealing with.
I always BUY/SHORT into the pattern/pullback but some people like to wait for a complete test and breakout away from the 20 SMA.
Fourth:
I ALWAYS buy HALF a position into the pattern/test and if the trade starts to work(hopefully right away, because 'time is money') and make money then I will add the other half and ride out a bigger move. I prefer to be wrong on a small amount then be wrong on a full position. BUY a half position and test it out, if you start making money then, that the market is agreeing with your assessment and trading decision and tells you to buy more because you are probably correct.
You know you are wrong when the pattern fails to hold the 20 SMA and that's when i just SELL it and MOVE ON to the next trade. Don't get stubborn and hold on to something that isn't working....please just sell it and move on. I don't use stop losses, i just use mental stops but i stick by them like my life depends on it. Trading isn't a game for slackers, dreamers, or optimists. Please just scratch the trade and move on to the next. This pattern is very common and reliable enough that be sure you'll have better success on the next trade.
Always trade in the direction of the overall trend of the market and you could make a killing on this setup. Always, trade with the order flow of the market. Why go LONG when the market is selling off. DON'T FIGHT THE TAPE! Trade holy grail patterns LONG if the market is bullish and trade inverse holy grail patterns in bearish markets.
*******A picture is worth a thousand words****** Enjoy!
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