Trading is a probability game. One of the better edges in trading is to have a higher probability that price would move in your favor rather than against it in the near future. Otherwise, you would end up holding a trade position at a loss hoping that price would reverse and go in your favor. On the other hand, if price initially moved in your favor, you would have some leg room to let price move about and not worry about it.
The Aroon Quantile Bands Forex Trading Strategy is one which takes into consideration the probabilities of a trade going in your direction within a few candles.
The Aroon Oscillator Indicator
The Aroon Indicator was developed by Tusar Chande in 1995. This indicator was intended to indicate when the trend is most likely to change. It does this by identifying the speed at which price reaches its highs and lows.
The standard Aroon indicator has two components, Aroon Up and Aroon Down. Each line measures the number of days since the high and low point within a given period of time, then divided by a preset number of periods. This creates two lines which oscillate up and down and at times crossing over each other. These crossovers indicate the point at which the trend has a high probability of reversing.
The Aroon Oscillator, although it has the same function, differs quite a bit from the standard Aroon indicator. What the Aroon Oscillator does is that is gets the difference between the two lines and plots it as histogram bars. Whenever the Aroon Up line is over the Aroon Down line, the Aroon Oscillator would be printing a positive histogram. On the other hand, if the Aroon Down is over the Aroon Up line, then the Aroon Oscillator would be printing a negative histogram bar. This makes it a lot easier on the eye as an indicator, while at the same time having the benefit of being able to measure how far apart the lines are. In theory, if the lines are farther apart, the trend tends to be stronger. Coming from a strong trend, you would also have an idea when the trend is slowing down since the histogram bars would be smaller.
The Quantile Bands
The idea of quantiles come from the field of statistics. Quantiles are basically cut points that divide a range into intervals with equal probabilities.
This idea borrowed from statistics was brought over to trading as a means to identify trend by looking at how the quantiles are moving.
The Quantile Bands are composed of three lines. The middle quantile and two outer quantiles. Trend is identified by how these lines are moving. In a bullish trend, you would notice all three quantiles moving up, while on a bearish trend, all three quantiles would be moving down.
Trading Strategy Concept
This strategy makes use of these two probability-based indicators to identify points wherein the market is more likely to reverse.
The Aroon Oscillator is used to determine an entry point wherein price would more likely move in the trades favor quite immediately, usually within 5 candles. Reversal strategies could sometimes be hard to catch, and many reversal trade setups could take quite long before price goes in your favor. The Aroon Oscillator allows us to take reversal trade setups that would more likely be in profit quite sooner.
The Quantile Bands on the other hand is used in order to identify trades that have a higher probability of reversing. This is quite accurate since the Quantile Bands themselves are based on probabilities and statistics.
Indicators:
- Quantile_bans_3
- Aroon_Oscillator_v1
- Aroon Period: 42
Timeframe: 1-hour and 4-hour charts
Currency Pair: major and minor pairs only
Trading Session: any
Buy (Long) Trade Setup
Entry
- The Aroon Oscillator should start printing dodger blue bars indicating a strong bullish trend
- The Quantile Bands should start sloping up
- The middle line of the Quantile Bands should change to lime green indicating the probable start of a bullish trend
- Enter a buy order at the confluence of the above conditions
Stop Loss
- Set the stop loss below the middle line of the Quantile Bands
Exit
- Close the trade as soon as the Aroon Oscillator histogram changes to white indicating a weakening trend
Sell (Short) Trade Setup
Entry
- The Aroon Oscillator should start printing red bars indicating a strong bearish trend
- The Quantile Bands should start sloping down
- The middle line of the Quantile Bands should change to sandy brown indicating the probable start of a bearish trend
- Enter a sell order at the confluence of the above conditions
Stop Loss
- Set the stop loss above the middle line of the Quantile Bands
Exit
- Close the trade as soon as the Aroon Oscillator histogram changes to white indicating a weakening trend
Conclusion
This strategy is one which is based on probabilities. In fact, both indicators emphasize probabilities on the way it observes the market. This allows us to take high probability reversal trades which could run in our favor.
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