This trading tactic can become an addition or the basis of a trading strategy, depending on the style of trading and the initial data in the resources. It is designed for medium-term transactions - from several weeks to several months. In the context of the year, the average profit which can be from 20 to 50% under normal conditions. This is the most conservative tactic that can give results in the long run. The idea is to keep risks as low as possible, as much as possible.
Important - this tactic is applicable in relation to the dollar or to another fiat currency, tests for BTC / ETH / BNB or other altcoins have not been carried out! Tests were made on the timeframe 1 day.
To work, you will need a basic understanding of technical analysis when working with a chart - horizontal levels, trend lines, etc.
It is important to take into account market cycles (probabilities based on analysis and indirect signs) in which the quote of a particular instrument is currently located - accumulation or distribution. If you use this tactic in the asset allocation phase, the risks are doubled (buy levels move lower and sell levels closer), this must be understood. In the distribution phase, you can go short, you can be out of the market (you will have to make an effort to wait and do nothing), waiting for the accumulation to start (long period) or try to take reverse price movements (corrective price movements followed by a continuation of the downtrend) .
Depending on the phase of the market (probabilities based on analysis and indirect signs), it is highly desirable to adjust the variable in percent of this tactic, but this will be discussed below.
Recommendation - one reading of this article may not be enough, and just reading will not be enough. Read the article from beginning to end, then conduct tests on the tradingview site on charts of highly liquid or medium liquid instruments that are unfamiliar to you (you will need a notebook with a pen for writing (write in the dates of (test) purchases / sales, entry amount and entry price and the number of virtual coins purchased + market simulator tool) After the practical steps, re-read this material again.
This tactic should be flexible from the conditions that arise in the process. If, for example, you use it on an altcoin with medium liquidity, and at that time, for example, there is a 60% dump of BTC with one stick, then make a second or third purchase on a pre-planned target -40% of the previous purchase, at least against logic, since the altcoin can lose more BTC in price, which is logical. A similar situation can occur when a project is hacked, etc., that is, this tactic works under normal market conditions, and in case of turbulence it needs to be adjusted, in some (rare) cases, the best solution may be to accept and fix losses.
What is the essence of the tactics “122-40%”
122-40% (1-2-2 - entries into the asset in pre-broken parts and an interval of 40% between purchases (depending on the situation, the percentage can and should change)) - means the distribution of resources allocated for the instrument to enter the transaction into 5 parts and sequential purchase of the tool, strictly at certain levels. The first part is activated during the first entry into the trade, 2 more parts at the next entry and the remaining 2 parts are the final entry. But the purchase should not be made chaotically, but according to a well-thought-out plan that you built yourself, and also thought out and accepted the risks.
Each subsequent purchase reduces the average entry price, especially the second one! If the price rises after the first purchase, then it is necessary to sell the previously accumulated volume and fix the profit at a pre-planned level, and then everything starts all over again. The first input is the working part, the remaining two are the safety reserve.
Below I will describe in detail the logic for inputs and fixations. You can naturally modify this tactic to your liking.
Management of risks
You need to understand that this tactic considers entering the instrument on a part of the deposit previously allocated for it, which in turn is divided into 5 equal parts.
Attention - not the deposit is divided into 5 parts to enter the asset, but the part that is allocated from the total deposit for a specific instrument is divided into 5 equal parts, it can be 10-5-2-1-0.5% (of the total deposit) and etc., depending on your inputs and your risk management.
It is desirable to use this tactic on highly liquid and medium liquid instruments. All sorts of small scams, with empty order books, hardly fit into the idea of this article.
Rules of Tactics 122-40
Hurry at the first entry - fraught with loss of time and profit. The first entry should be at the lower level of the trading range.
The 40% interval is a beacon (it moves depending on the situation), it should be adjusted depending on the behavior of the quote. In a falling market, it is rational to increase the distance to the next purchase from 40% to 45-50%, in a growing market, on the contrary, to reduce from 40% to 35-30%.
It is important to take into account the volatility of the instrument from the history of its chart, for example, the volatility of XRP is often much higher than on LTC, for example. To do this, measure the dumps and the main price movements on history with a ruler and, based on these data, adjust the levels for subsequent purchases.
We take trading ranges on the chart as a basis (price movement zone between horizontal levels).
If, after the purchase, the price went lower and the second limit order triggered (access to lower trading ranges / the price fell by 30% or more from the previous purchase), place the entire previously purchased volume for sale as a limit order at the purchase price of the first part or with a profit 40+-%, so the average sale will be higher than the average purchase price - profit. The initially set target for the first purchase loses its relevance if the quote moves to lower ranges. In order for the quote to reach the first target, a strong pump is needed (percentages are a relative value, the fall cannot be more than 100%, and the growth is theoretically infinite), the probability of which is decreasing all the time, while the return of values to the last purchase zone is more likely. In addition, in a falling market it is rational to move the selling price lower, in a falling market to take a profit of 20% - for most participants, this is a fantasy task.
In case of a neutral market situation, the approximate percentage of the quote decrease from the purchase price of the previous buying range is approximately 40%. In the case of a growing market (uptrend), the percentage decreases by 5-10% (it is logical after a long bear market), in the case of a falling market, the percentage increases by 5-10% (it is logical if there was euphoria on the market recently, which was preceded by a long bull market) . More on this below.
When the price shifts to lower trading ranges:
7.1 Risks and profits increase, and the time to make a profit is potentially reduced if you make an entry on a pre-marked range, since the first dump to a new range is usually more significant (if you plan to trade). In slang, this is called “catching knives”, the price can jump even lower on impulse, these are risks.
7.2. The risks are significantly reduced, and the time for buying is delayed if you make the 2nd and 3rd purchases after the formation of a new trading range (on large timeframes) from the conditional bottom. Support and resistance of the conditional channel are confirmed by touching the quote several times.
It is necessary to control horizontal levels, they are important in side trades. Move them if necessary. Do not try to take the lows and highs, in most cases it will turn into a waste of time.
In a falling market, including after the second or third purchase, it is rational to cut the profit percentage even more, that is, if the second purchase is at -50% from the previous one, then in order to sell everything from the first purchase zone, you need to wait for growth at 100%, cut sales targets so that you don’t fall at a loss and get profit, but rational situations.
In some cases, after the third purchase, it is rational to break even or with a minimum profit in order to start from the beginning. A long decline often means the beginning of an accumulation/accumulation/flat phase, in which case the price can stay at the same level for quite a long time. Being out of the market in this case means losing profits, and trading buys from support and sells from resistance is a profit. The presence of reserves in the form of 80% of the allocated resources will remove any psychological pressure.
After the first purchase, the risks are minimal, since there is a reserve in the form of 80% of the allocated volume, this is the working volume.
After the second purchase, the maximum profit, by reducing the average entry price and tripling the volume of the position, 30-40% profit is an excellent indicator to start over.
After the third entry, it is advisable to close the position with a minimum profit or, if there are signs of accumulation or further potential decline, close the entire position to breakeven and start over.
If the first buy order did not work, and the price went higher (clear uptrend), then all 3 entry points are corrected. There is no need to rush, wait for confirmation of a new range, while it is important to skillfully work with horizontal levels. The first one is from the bottom of the already new range, the next ones, depending on the situation, -40%+- from the first entry.
Sales zone - floating and plastic from the situation from 20 to 50%. In an uptrend, the profit is greater; in a downtrend, the target should be reduced.
The first entry is important, as you need to correctly determine the trading range. From the first entry, plan the next 2 entries in advance, where -40%+- from the situation for the instrument (from the first entry point).
You always need to understand the situation on the instrument from a great distance, that is, what happened 1 month ago, what happened 6 months ago, 1 year. If 1 year ago there was an increase of 10,000%, and the correction was 20-30%, then it is rational to expect a further decline, respectively, each subsequent purchase should be from the previous one -40% + (45-50%). If the current range has acted as support for the last 3 years and the price is relatively at the bottom, then on the contrary, each subsequent purchase should be closer to the previous one, not -40%, but -35% or -30%.
Likewise with sales. If this is a falling market and you are trying to take a rebound, then it is rational to set the profit at a distance of 20-30% from the purchase level, if this is the bottom and the last 2-3 years of the history of the chart show this, then it is rational to move the sell zone further, say by 40-60 % of the purchase level.
You can modify this tactic to fit your background and needs. For example, not 3 inputs, but 5; divide the allocated amount not into 5 parts but into 10; to double in volume not only the second selected part, but also the third in relation to the second. The tactics described in this article are optimized towards universality. Each of you has your own situation in terms of resources, skills, experience and style of trading.
Tests
The tests were carried out on 3 instruments paired against the dollar XLM, LTC, XRP. Positive dynamics was obtained on all instruments.
It should be noted that for XRP the main work was carried out by the first order, for XLM and LTC the second and third entries were involved, including the second and third entries many times, XLM showed the most profit - an average annual of 50%.
The average annual LTC was 25% over 4 years.
For XRP, the last decline brought the 5-year trading test to the profit zone of 40% of the initial one (there was an unsold position of two entries and 1 reserve purchase). For XRP, the test on the chart began after a 10,000% increase, almost at the peak, this is important.
That is, this tactic can work in any phase of the market for profit, with proper use and risk management.
This article is a translation of my article written in Russian, the original can be found at the link.