Trading HOLY GRAIL Patterns

• Posted by TraderStewie
• on October 29th, 2009

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.

First of all The “Holy Grail” trade was originally described in Linda Bradford Raschke’s Street Smarts book. This setup is VERY easy and simple, 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 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 or 10 minute chart. 1 minute charts work really well too.
2. A strongly trending stock, chart or index.
3. Volume indicator
4. The 20 Period Moving Average (simple or exponential)
5. Basic pattern recognition skills
6. Respect for Stops losses
7. An ego that can 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).  The trend can 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:
Once you have decided what the trend is (market direction helps a lot as well),  be on the look out for clean and crisp movement in the stock. Movement with confidence i like to think of it as.

Third:
Look at volume to see conviction in the move.  Lots of volume during the first hour will tell you the force of the move UP or DOWN.  Volume increases the confidence in the move and gives validity of the action.

Fourth:
Now, this is the most important part of the setup and where it becomes an art moving away from the ‘science’ of trading.  You wanna see a slow and corrective retrace back to test the 20 bar simple moving average (20 SMA).  You do NOT wanna see a hard crash into the 20 period moving average, this is NOT constructive action.  You wanna see a hammer or several hammers off that 20 SMA, a pattern like a triangle, a wedge or a coiling symmetrical triangle, NR7s, or 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, it will 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.

Fifth:
ALWAYS buy HALF a position into the pattern/test and if the trade starts to work (hopefully right away, because the best trades work right away)  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.  If you are seeing a profit in the trade, that should tell you that the market is agreeing with your assessment 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 starts to break below or above the area of consolidation which attracted to the trade to begin with.  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 always use stop losses.  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 I am confident you will see success from this trading setup.

*******A picture is worth a thousand words****** Enjoy!

Trade well!

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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