How to Trade with the Traffic Light Strategy by Power of Stocks

Introduction:

Are you tired of constantly losing money in the stock market? Do you want to learn a simple and effective trading strategy that can help you identify entry and exit points for intraday and swing trading? Look no further than the traffic light strategy by Power of Stocks!

One such strategy is the Traffic Light Strategy by Power of Stocks. This strategy is based on the concept of a traffic light, which indicates when to buy, sell, or hold a stock. The Traffic Light Strategy uses three indicators: the 200-day exponential moving average (EMA), the 20-day EMA, and the 5-day EMA.

What is the Traffic Light Strategy?

The traffic light strategy is a trading strategy that uses 5 exponential moving averages (EMAs) and Bollinger Bands to identify entry and exit points for intraday and swing trading. The strategy was introduced by Subhasish Pani, the founder of Power of Stocks, in a stock market growth conclave in 2023.

How does the Traffic Light Strategy work?

To use the traffic light strategy, plot 5 EMAs with periods of 3, 5, 8, 13 and 21 on a 15-minute chart of any stock or index. Also plot Bollinger Bands with a period of 20 and a standard deviation of2. The EMAs act as support and resistance levels and also indicate the trend direction, while the Bollinger Bands act as volatility indicators and also show overbought and oversold conditions.

The EMAs are color-coded as follows: red for 3 EMA, green for 5 EMA, yellow for 8 EMA, blue for 13MA and purple for 21 EMA. These colors form the basis of the traffic light analogy. A buy signal is generated when the price crosses above all the EMAs and the upper Bollinger Band. A sell signal is generated when the price crosses below all the EMAs and the lower Bollinger Band.

The 200-day EMA acts as a long-term trend indicator. It shows whether the overall market is bullish or bearish. The 20-day EMA acts as a medium-term trend indicator. It shows whether the current market is in an uptrend or a downtrend. The 5-day EMA acts as a short-term trend indicator. It shows whether the market is in a pullback or a continuation.

How to Manage Risk with the Traffic Light Strategy? 

To manage risk, the stop loss for a buy trade is placed below the lowest EMA or the lower Bollinger Band, whichever is lower. The stop loss for a sell trade is placed above the highest EMA or the upper Bollinger Band, whichever is higher. The target for a buy trade is calculated by adding the difference between the highest EMA and the lowest EMA to the entry price. The target for a sell trade is calculated by subtracting the difference between the highest EMA and the lowest EMA from the entry price.

How to Use the Traffic Light Strategy? 

The strategy can be modified by using different time frames, periods, colors and indicators according to one's preference and risk appetite. But the traffic light strategy by Power of Stocks provides a solid foundation for traders looking to make informed decisions in the stock market.

How to Start Using the Traffic Light Strategy? 

To start using the traffic light strategy, make sure you have a solid understanding of the strategy and how it works. Then, practice using it with a demo account or with small amounts of money until you feel comfortable. And always remember to manage your risk and stick to your trading plan.

The Traffic Light Strategy works as follows:

• When the 200-day EMA is above the price, it means that the market is in a long-term bearish trend. This is indicated by a red light on the traffic light.

• When the 200-day EMA is below the price, it means that the market is in a long-term bullish trend. This is indicated by a green light on the traffic light.

• When the 20-day EMA is above the price and below the 200-day EMA, it means that the market is in a medium-term downtrend within a long-term bearish trend. This is indicated by an orange light on the traffic light.

• When the 20-day EMA is below the price and above the 200-day EMA, it means that the market is in a medium-term uptrend within a long-term bullish trend. This is indicated by a yellow light on the traffic light.

• When the 5-day EMA is above the price and below the 20-day EMA, it means that the market is in a short-term pullback within a medium-term downtrend. This is indicated by a red dot on the traffic light.

• When the 5-day EMA is below the price and above the 20-day EMA, it means that the market is in a short-term pullback within a medium-term uptrend. This is indicated by a green dot on the traffic light.

• When the 5-day EMA crosses above both the 20-day EMA and the price, it means that the market is in a short-term continuation within a medium-term uptrend. This is indicated by an arrow pointing up on the traffic light.

• When the 5-day EMA crosses below both the 20-day EMA and the price, it means that the market is in a short-term continuation within a medium-term downtrend. This is indicated by an arrow pointing down on the traffic light.

Based on these signals, you can decide when to buy or sell a stock using the Traffic Light Strategy. Here are some general rules:

• Buy when you see a green light and an arrow pointing up on the traffic light.

• Sell when you see a red light and an arrow pointing down on the traffic light.

• Hold when you see an orange or yellow light on the traffic light.

• Avoid trading when you see a red or green dot on the traffic light.

There are several opportunities to buy or sell using this strategy.

• - On April 1st, you see a green light and an arrow pointing up on the traffic light. This indicates that Nifty has entered into a short-term continuation within a medium-term uptrend. You can buy Nifty at around 14,800 points.

• On April 7th, you see an orange light on the traffic light. This indicates that Nifty has entered into a medium-term downtrend within a long-term bearish trend. You can hold your position or book partial profits at around 14,950 points.

• On April 12th, you see another green light and an arrow pointing up onthe traffic light. This indicates that Nifty has entered into another short-term continuation within a medium-term uptrend. You can buy more Nifty at around 14,600 points.

• On April 16th, you see another orange light on the traffic light. This indicates that Nifty has entered into another medium-term downtrend within a long-term bearish trend. You can hold your position or book partial profits at around 14,850 points.

• On April 22nd, you see another green light and an arrow pointing up on the traffic light. This indicates that Nifty has entered into another short-term continuation within a medium-term uptrend. You can buy more Nifty at around 14,400 points.

• On April 28th, you see another orange light on the traffic light. This indicates that Nifty has entered into another medium-term downtrend within a long-term bearish trend. You can hold your position or book partial profits at around 14,750 points.

By following this strategy, you could have made around 400 points profit per lot of Nifty in one month.

Of course, this strategy is not foolproof and there are some limitations and risks involved.

Some of them are:

• The strategy may not work well in choppy or sideways markets where there are frequent whipsaws and false signals.

• The strategy may not capture big moves or trends that last longer than one month.

• The strategy may require frequent monitoring and adjustment of stop-losses and targets depending on market conditions.

• The strategy may incur high brokerage and transaction costs due to frequent trading.

Therefore, before using this strategy, you should do your own research and backtesting to verify its performance and suitability for your trading style and risk appetite.

• You should also use proper risk management techniques such as position sizing, stop-losses,and trailing stops to protect your capital and lock your profits.

• The Traffic Light Strategy by Power of Stocks is an interesting and simple way of trading intraday using three moving averages.

• It can help you identify potential entry and exit points based on trend changes and continuations.

However,

• it also requires careful analysis,
• discipline,
• and patience to execute it successfully.

Conclusion

In summary, the traffic light strategy by Power of Stocks is a simple and effective trading strategy that can help traders identify entry and exit points for intraday and swing trading. By using 5 EMAs and Bollinger Bands, traders can make informed decisions based on support and resistance levels, trend direction, and volatility indicators. So why not give it a try and see if it works for you?

I hope this article helps you understand the traffic light strategy by Power of Stocks and how you can use it to make informed decisions in the stock market.