Throughout all of my trading and investing education I’ve found one trade setup that I like use to pick up a few bucks here and there and I like to call it “The Starbucks Trade.”

This trade setup focuses exclusively on looking for small opportunities for gains in the market. You can use those small gains to then fund your bad habits if you have any, “Venti Pike Place Roast Please.”

The great thing about this trade is that it’s setup to be a quick in and out type type of trade.

Step 1 – Setting Up Your Chart For The Trade

Make sure your chart is setup the with the following characteristics:

• Set a 20-period Exponential Moving Average (EMA) on the price
• Add a Moving Average Envelope (MAE) to price with the following settings
• Set to 20 periods
• Percent Shift of 4%
• Add the Awesome Oscillator (AO) to the chart set to 5 and 21
• Add an Average True Range (ATR) set to 14

Now your chart should look something like this…

Chart Setup For The Starbucks Trade

Step 2 – “Brewing” The Trade

The concept behind this trade strategy is revolved around a mathematical term called “Regression to the Mean.”

Simply put, when prices stretch out in either direction (up or down) they tend to “regress” back to the average price.

The “regression” part of price movement is what we are targeting in this trade and where the profits are to be made.

Trade Setup

So, we have a 20 period Exponential Moving Average (EMA) on the chart below (red line) and a 20 period Moving Average Envelope (green lines above and below) with a 4 % shift. The 20 period EMA represents the mean and the EMA lines above and below this line represent price areas we are targeting where we think price has moved “too far” and is set to regress back to the mean (EMA).

Step 1 Trade Setup Met At Orange Boxes

When looking to implement The Starbucks Trade, your setup is when price action tests the upper or lower (green) EMA lines. Once this happens, now you wait for the trigger initiated by the Awesome Oscillator (AO).

Step 3 – Trade Trigger Entry

The Awesome Oscillator (AO) is a momentum type oscillator and is going to be the trigger to enter this trade. When this indicator changes colors it represents a change in price momentum which is our signal that prices may be reversing back to the mean.

Yellow Arrows = Potential Entry Triggers

Once the trade setup from above has been met, now you are waiting for the oscillator to change colors indicating a change in momentum and an entry into the trade.

The yellow arrows in the above chart represent two places on this chart where the trade setup was met first (price hitting upper or lower ranges) and entries are triggered by a change in momentum indicated by the Awesome Oscillator (AO) changing from green to red at the first arrow and red to green at the second arrow.

Step 4 – Trade Trigger Exit

Your exit for this trade is when price reaches the mean which in this case is the 20 period EMA.

Blue Circles Indicate Potential Trade Exits

The blue circles in the chart above indicate where price has regressed back to the mean and thus represent exit points for both potential trades entries outlined above.

Depending on what trade platform you use, the best way to execute this trade is to include a trigger to exit your trade once price hits the mean. Set this trigger when you enter your trade!

That way once you are in the trade, you know that once price hits your target you will be triggered out of the trade automatically.

Tweaking The Starbucks Trade

As with all trade setups, using the help of Technical Indicators to time trade entries and exits means that the settings on these indicators can be tweaked for the current market conditions of the stock or market you are trading.

Things like volatility can have a big impact, for instance, on if you should increase or decrease your “percent shift” of the Moving Average Envelope (EMA) for this trade to help with better setups.

Start out with the default settings above and then if you notice the stock you are wanting to trade goes above or below the Exponential Moving Average (EMA) lines more than you think they should then increase the %shift and reevaluate the chart.

Limitations of The Starbucks Trade

As with any trading plan you have to know what it’s strengths are and what it’s weaknesses are. No trading plan works in every trading environment with absoluteness. That’s why you have to broaden your horizons and learn how to trade in multiple trading environments (up market, down market, sideways market, volatile market, non volatile market, etc…).

Limitations Of This Trading Plan:

• This is a “market timing” type of trade aimed at making small gains.
• If the market runs away to the upside or downside you won’t have many trading opportunities.
• If the market triggers an entry and never reaches the mean you will be faced with a losing trade (use stop losses!)

*The information contained in this article is for illustrative purposes only. TechnicalAnalysisAtoZ.com is not a broker/dealer and thus anything contained on this site is not intended to be investment advice. Past performance does not indicate future results and investors must consider all relevant risk factors including their own personal financial situations before making trading decisions.