Getting in at a confirmed short-term trend and exiting the trade prior to the short-term reversal is a key logic when trading trends. Although this may sound simple, but very few traders learn this very important skill. It might be because most traders think of a trading setup as having the same logic for entries and exits. While symmetry for entries and exits could work in some cases and could even squeeze out more profits in a strongly trending market, focusing on confirmed short-term trends and exiting early usually allows for more high probability trade setups.
This strategy’s approach is that of entering on a confirmed short-term trend and exiting prior to the actual reversal using two indicators that complement each other in such a way.
Aroon Up and Down
In the Sankskrit, “Aroon” translates to “Dawn’s Early Light”. Looking at how well it works, it does seem to signal the dawn of a new short-term trend.
The Aroon indicator is quite different as compared to other momentum oscillators. While other momentum oscillators give emphasis to price in relation to a number of periods, the Aroon indicator gives emphasis to time in relation to a price’s high and low. It does this by counting the number of periods since the last high and the last low and dividing it to the base number of periods.
The Aroon indicator has two lines, the Aroon Up and Aroon Down. If price is constantly making new highs, then the Aroon Up will be above the Aroon Down. If on the other hand price is constantly making new lows, the Aroon Down will be above the Aroon Up.
Although the Aroon indicator means “Dawn’s Early Light”, it doesn’t exactly give trade signals too early. It somehow gives a signal on a confirmed trend.
Fisher Yur4ik
As strange as the name of this indicator is, the idea behind the strategy also seems to be as mysterious. The author of this indicator has managed to keep the idea or mathematical formula behind this indicator to himself.
What we know is that it plots histogram bars that oscillates around zero. If the bars plotted are positive, then the trend is bullish. If negative, then it is bearish.
Although we don’t know exactly how this indicator plots its bars, it somehow seems to do well in determining short-term trends. One characteristic it has is that it leans more towards very early on a trend. Signals are typically generated earlier than other indicators.
Trading Strategy Concept
As you would know, the above indicators are our main entry and exit points for this strategy, but before we get to that, let us first determine our main trend filter.
For this strategy, we will be using the 50-period Exponential Moving Average (EMA) as our main trend filter. This moving average is typically used to determine the intermediate-term trend. Given that we are trading on the short-term trend, we would want to align our trades on the short-term with the intermediate-trend. Trend will be determined by looking at the location of price in relation to the 50 EMA.
As for the entry signal, we will be basing our entries on the Aroon Up & Down custom indicator. Entry signals will be determined by the crossover of the the Aroon Up and Aroon Down lines. Because the Aroon indicator generates signals a tad later, when the short-term trend is confirmed, this indicator is ideal for the kind of strategy we want.
The exit signals will be quite the opposite. What we want is an exit that is a tad earlier than the actual reversal of the short-term trend. This is where the Fisher Yur4ik indicator comes in. Trades will be manually closed as soon as the Fisher Yur4ik reverses.
Because we are trading on the short-term trend and have the medium-term trend as our filter, we will be basing our stop loss on the 50 EMA. However, the stop loss will be an emergency stop loss. If the trade setup is invalidated by the Fisher Yur4ik prior to hitting the stop loss, the trade still has to be closed even at a loss.
Indicators:
- 50 EMA (green)
- Aroon
- Aroon Up (Dodger Blue)
- Aroon Down (Red)
- Fisher_Yur4ik
- Bullish (Lime)
- Bearish (Red)
Timeframe: 5-minute, 15-minute, 30-minute, 1-hour, 4-hour and daily charts
Currency Pair: any major and minor pairs
Trading Session: any (day trade on Tokyo, London and New York session)
Buy (Long) Trade Setup
Entry
- Price should be above the 50 EMA
- The Fisher Yur4ik indicator should print lime bars
- Enter a buy order as soon as the the Aroon Up line crosses above the Aroon Down line
Stop Loss
- Set the stop loss below the 50 EMA
Exit
- Close the trade as soon as the Fisher Yur4ik indicator prints a red bar
Sell (Short) Trade Setup
Entry
- Price should be below the 50 EMA
- The Fisher Yur4ik indicator should print red bars
- Enter a sell order as soon as the the Aroon Up line crosses below the Aroon Down line
Stop Loss
- Set the stop loss above the 50 EMA
Exit
- Close the trade as soon as the Fisher Yur4ik indicator prints a lime bar
Conclusion
This strategy is an excellent strategy. This is because it is hinged around entering at a confirmed trend-based setup, while exiting prior to the actual reversal. This method allows traders to have high probability trades, while not giving back much of the profits to the market.
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