Trend Continuation Strategies have a simple concept. Identify a trending market and wait for a signal that the trend is about to continue. Some would trade on the momentum breakouts moving in the direction of the trend. Others would wait for pullbacks.
This strategy is a trend continuation strategy trading on pullbacks, which uses the RSI and the Brain Trend 2 indicators to objectively identify such trend continuation scenarios.
Brain Trend 2 Indicator
The Brain Trend 2 Indicator is a custom technical indicator which was developed to help traders identify the direction of the trend. This trend direction is derived from the use of an underlying Average True Range (ATR) indicator.
One concept that traders use to identify trend reversal is based on price action moving against a prior trend by more than a predetermined multiple of the ATR. This is often set at a multiple of two. However, traders can vary this multiple based on their preference. In effect, this can also help traders identify trend direction since price action would usually not move against the prior trend by more than the preset ATR multiple whenever the market is trending.
This concept is an effective way to identify trends. However, it is rather difficult to implement on a naked chart since it would be cumbersome for traders to keep measuring the distance of each pullback or reversal candle.
The Brain Trend 2 Indicator is based on this same concept but it has improved on it by allowing traders to easily identify trend direction and spot reversals based on the color of the bars it plots.
This indicator simply shades the color of the candlesticks based on the trend direction it identifies. It colors the candles lime whenever it detects a bullish trend, and magenta whenever it detects a bearish trend.
This indicator is preset to detect short-term trends based on its settings.
Traders can use the changing of the color of the bars as a short-term trend reversal signal in confluence with the long-term trend.
Relative Strength Index
The Relative Strength Index (RSI) is a widely used oscillator type of indicator, which detects momentum based on the movements of price action.
The RSI plots a line which oscillates within the range of zero to 100. The line it plots typically has a jagged characteristic and is very responsive to price action fluctuations.
It is also usually preset to have markers at levels 30 and 70, which are used as oversold and overbought markers. An RSI line dropping below 30 indicates an oversold market, while an RSI breaching above 70 indicates an overbought market, both of which are prime conditions for a mean reversal scenario.
Although the RSI is typically used to identify mean reversals, it can also be used to determine trend direction and trend continuations. This is done by simply adding levels 45, 50, and 55.
In an uptrend market, the RSI line would typically stay above 50 with the level 45 as the support for the RSI line. It would also typically break above 55 whenever the trend is about to continue.
Inversely, in a downtrend market, the RSI line would usually stay below 50 with 55 as the resistance for the RSI line. A drop below 45 would also usually signify that the downtrend is about to continue.
Trading Strategy Concept
This strategy is a trend continuation strategy which uses the confluence of the RSI and the Brain Trend 2 line as its trend continuation signal.
First, we are to identify the trend direction. This is based on whether the RSI line is generally above or below 50, and whether the levels 45 or 55 are acting as support or resistance for the RSI line.
If so, we could then wait for a trend continuation signal based on the confluence of the RSI breaching above 55 or dropping below 45, and the Brain Trend 2 bars changing color indicating the trend continuation.
Buy Trade Setup
- Price action should be in an uptrend with price swings continually moving higher.
- The RSI line should generally be above 50 and never dropping below 45.
- Wait for price action to pullback causing the Brain Trend 2 bars to temporarily change to magenta, and the RSI line to drop within the 45 to 55 range.
- The Brain Trend 2 bars should change back to lime as price action shows signs of a trend continuation.
- The RSI line should breach back above 55.
- Open a buy order on the confluence of these bullish trend continuation signals.
- Set the stop loss on the support below the entry candle.
- Close the trade as soon as the Brain Trend 2 bars change back to magenta.
Sell Trade Setup
- Price action should be in a downtrend with price swings continually dropping lower.
- The RSI line should generally be below 50 and never breaching above 55.
- Wait for price action to pullback causing the Brain Trend 2 bars to temporarily change to lime, and the RSI line to break within the 45 to 55 range.
- The Brain Trend 2 bars should change back to magenta as price action shows signs of a trend continuation.
- The RSI line should drop back below 45.
- Open a sell order on the confluence of these bearish trend continuation signals.
- Set the stop loss on the resistance above the entry candle.
- Close the trade as soon as the Brain Trend 2 bars change back to lime.
This trend continuation strategy can be a very effective trend continuation strategy when used in the right market condition. It works best on trending markets with a strong propensity to move in long pulses in the direction of the trend. This often allows for high yields relative to the risk. It can also produce profits in slower moving trends. However the yields would usually be lower relative to the risk. In such case, it is important for traders to be mindful of the potential risk reward ratio.
This strategy can work well in a trending market environment, but it is not effective in ranging and choppy market conditions. It is best to avoid using this strategy is such market conditions to avoid losses.
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