Trend reversals are market conditions in which many traders might earn enormous gains or huge loses. Traders that pursue price as a habit wind up trading in the direction of a dying trend. Those who do not employ equity protection by implementing stop losses or hedges risk losing a large amount of their trading accounts. On the other side, the few traders who predicted the trend reversal may be in for a wild trip. They might be generating large gains since they are initiating a trade at the beginning of a trend and exiting the deal when the trend reverses.
Trading trend reversals is challenging, but it can also be highly rewarding. It is challenging since it is difficult to predict trend reversals. It is rewarding because to the possibility of exponential earnings.
Traders sometimes employ a confluence of trend reversal indications to forecast a trend reversal. Confluences are extremely potent because they are places where indications from many trend reversal scenarios converge. These are frequently situations where many traders might spot a probable trend reversal and enter a trade.
Trend Reversal Synergy Forex Trading Method is a systematic trend reversal trading strategy that trades on reversal signals generated by three high probability trend following and momentum indicators.
Smoothed Heiken Ashi Indicator
The Heiken Ashi Smoothed indicator is a trend tracking indicator that uses Heiken Ashi Candlesticks as its foundation.
Heiken Ashi literally translates to “average bars” in Japanese. This is exactly what Heiken Ashi Candlesticks are. They are essentially candlesticks that take into consideration the average price movement. It still displays the candle’s high and low, but it alters the open and close based on the average price movement.
Heiken Ashi Smoothed is another mediocre bar. It averages the price fluctuation over time. Instead of presenting a candlestick-style price chart, it depicts bars that move in sync with moving averages. The Heiken Ashi Smoothed indication, in reality, is more closely connected to moving averages like the Exponential Moving Average than the Heiken Ashi Candlesticks.
This is an extremely dependable trend following indicator. When it identifies a trend reversal, it plots bars that change color. It is particularly sensitive to trend reversals while also reducing misleading signals caused by market noise.
Awesome Oscillator
The Awesome Oscillator (AO) is a trend-following technical indicator based on the intersection of two moving average lines.
The Awesome Oscillator bases its estimate of market trend direction on the difference between a 5-period and a 34-period Simple Moving Average (SMA) (SMA). It does, however, utilize the median of each candle rather than the typical closing of each candle. The outcomes are then shown as histogram bars that fluctuate around zero.
The AO determines trend direction and intensity depending on whether the bar is positive or negative and the color of the bar. Positive green bars suggest a bullish trend that is strengthening, while positive red bars indicate a bullish trend that is weakening. Negative red bars show that the bearish trend is strengthening, whilst negative green bars suggest that the bearish trend is diminishing.
RSI Filter
The Relative Strength Index (RSI) Filter is a momentum technical indicator based on the Relative Strength Index (RSI).
The basic RSI is a very adaptable indicator. It can offer information on trend direction, momentum, and prices that are overbought or oversold.
The RSI line’s position in reference to its midpoint determines trend direction.
Momentum is determined by the RSI line crossing above or below 70. A break over 70 may suggest bullish momentum, but a break below 30 may indicate negative momentum.
The RSI Filter is based on the RSI’s trend and momentum indicators. It produces positive bars anytime the RSI line exceeds 70 and continues to do so until the RSI line falls below 50. On the other hand, once the RSI line falls below 30, it draws negative bars and continues to do so until the RSI line rises over 50.
Trading Strategy
This trading technique is based on the convergence of trend reversal indications from the three indicators.
Signals are created on the Heiken Ashi Smoothed indication anytime the Heiken Ashi Smoothed bars change colors, signaling a likely trend reversal.
Signals are created on the Awesome Oscillator anytime the bars move from negative to positive or vice versa.
The RSI Filter then generates alerts anytime the bars change from positive to negative or vice versa.
These signals should be somewhat close together. This would imply that the trend reversal was caused by a significant momentum shift.
Indicators:
- Heiken_Ashi_Smoothed
- Awesome
- RSIFilter
Preferred Time Frames: 1-hour, 4-hour and daily charts
Currency Pairs: FX majors, minors and crosses
Trading Sessions: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- The Heiken Ashi Smoothed bars should change to lime.
- The Awesome Oscillator bars should shift to positive.
- The RSI Filter bars should shift to positive.
- Enter a buy order on the confluence of these conditions.
Stop Loss
- Set the stop loss below the Heiken Ashi Smoothed bars.
Exit
- Close the trade as soon as the Heiken Ashi Smoothed bars change to red.
Sell Trade Setup
Entry
- The Heiken Ashi Smoothed bars should change to red.
- The Awesome Oscillator bars should shift to negative.
- The RSI Filter bars should shift to negative.
- Enter a sell order on the confluence of these conditions.
Stop Loss
- Set the stop loss above the Heiken Ashi Smoothed bars.
Exit
- Close the trade as soon as the Heiken Ashi Smoothed bars change to lime.
Conclusion
This is a fundamental trend reversal technique based on the convergence of three high probability trend following indicators.
The Awesome Oscillator and the Heiken Ashi Smoothed indicator compliment each other quite well. When they make trend reversal signs near together, they frequently produce good quality signals.
The RSI Filter provides momentum confirmation, making the case for a trend reversal much stronger.
