Regular Divergence Trend Reversal Forex Trading Strategy

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Regular Divergence Trend Reversal Forex Trading Strategy 1

Trend Reversal Strategies are some of the most profitable types of strategies. It allows traders to gain huge yields on each successful trade. Trades could just be starting points of a fresh trend going the other direction. In these situations, traders could expect to gain so much on these trades.

However, it is also some of the most difficult strategies to master. Traders are either often late to enter a reversal trade or are trapped in a trade as a result of false signals and whipsaws. The first could be a result of taking trades based on lagging signals, while the second could be a result of taking signals too early. To successfully trade trend reversals, traders must find a good middle ground between the two. Trades should be waited for patiently enough for a confirmation to take place and avoid false signals. On the other hand, trade signals should not be too lagging to cause traders to enter trades too late.

One way to deal with these situations is to have an initial signal of a probable trend reversal. As soon as we get that initial sign of a reversal, all we must do is to wait for the actual trend reversal signal to occur. The Regular Divergence Trend Reversal Forex Trading Strategy is based on such trading plan.

FX5 MACD Divergence

FX5 MACD Divergence is a custom technical indicator which helps traders identify divergences based on the Moving Average Convergence and Divergence (MACD).

This indicator is basically a MACD oscillator. It displays two lines that oscillate freely around zero. These lines are the MACD Line and the Signal Line.

The MACD Line is basically a computation of the difference between two moving average lines. The Signal Line on the other hand is a moving average line derived from the MACD line.

Although this indicator is much like the standard MACD indicator in most ways, it has some unique features that are very helpful for trend reversal traders. It indicates divergences between peaks and troughs coming from the MACD indicator and the swing points of price.

Divergences are indicative of a probable trend reversal. Although not all divergences would result in a trend reversal, many of its signals do result in a trend reversal.

Probably the best advantage of being able to identify divergences is that it is predictive instead of lagging. It allows traders to anticipate trend reversals rather than wait for a trend reversal and chase the market even if it is too late.

Guppy Multiple Moving Average Long

The Guppy Multiple Moving Average (GMMA) is a trend following indicator that identifies trend direction, trend reversals and dynamic supports and resistances using multiple moving averages.

The standard GMMA indicator uses two sets of moving averages, one set represents the shorter-term trend, while the other represents a longer-term trend. The short-term trend set is composed of moving averages with a period of 3, 5, 8, 10, 12 and 15. The longer-term trend on the other hand has moving averages with a period of 30, 35, 40, 45, 50 and 60.

This variation of the GMMA displays only the long-term trend set. This makes it useful for long-term trend reversal strategies.

In this setup, the fastest moving average line is color gold while the slowest moving average line is color green. The moving average lines between the two are color blue.

Fractal Adaptive Moving Average

Fractal Adaptive Moving Average (FRAMA) is a modified moving average line developed by John Ehlers.

This moving average line puts more emphasis on significant price movements and puts lesser weight on less significant price movements. As a result, the moving average line responds faster whenever the market starts to trend but at the same time remains flat whenever the market is ranging.

FRAMA takes into account the observation that price movements are fractal. It then adjusts its readings of the market based on the fractal characteristic of price movements.

Trading Strategy

This trading strategy anticipates trend reversals based on regular divergences as identified by the FX5 MACD Divergence indicator. It then takes the actual trade signal as indicated by the Guppy Multiple Moving Average (GMMA) Long indicator and the Fractal Adaptive Moving Average (FRAMA) indicator.

The GMMA Long indicator acts as the actual signal indicator. Trades are taken based on the crossing over of the gold and green moving average lines.

The FRAMA indicator on the other hand acts as a confirmation that the short-term trend is aligned with the trend direction as indicated by the GMMA indicator.

Indicators:

  • FX5_MACD_Divergence_V1.1 (default settings)
  • GMMA_Long (default settings)
  • FRAMA (default settings)

Preferred Time Frames: 30-minute, 1-hour, and 4-hour charts

Currency Pairs: major and minor pairs

Trading Session: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • A bullish regular divergence should be observed on the swing low of price represented by solid lines below the price candles and the MACD Line or Signal Line.
  • Price should cross above the GMMA Long lines.
  • The FRAMA line (dark blue) should cross above the GMMA Long lines.
  • The gold line of the GMMA Long indicator should cross above the green and blue lines.
  • Enter a buy order on the confirmation of the conditions above.

Stop Loss

  • Set the stop loss a few pips below the GMMA Long band.

Exit

  • Close the trade as soon as a bearish divergence is indicated by the FX5 MACD Divergence indicator.
  • Close the trade as soon as price closes below the GMMA Long green line.

Regular Divergence Trend Reversal Forex Trading Strategy 1

Regular Divergence Trend Reversal Forex Trading Strategy 2

Sell Trade Setup

Entry

  • A bearish regular divergence should be observed on the swing high of price represented by solid lines above the price candles and the MACD Line or Signal Line.
  • Price should cross below the GMMA Long lines.
  • The FRAMA line (dark blue) should cross below the GMMA Long lines.
  • The gold line of the GMMA Long indicator should cross below the green and blue lines.
  • Enter a sell order on the confirmation of the conditions above.

Stop Loss

  • Set the stop loss a few pips above the GMMA Long band.

Exit

  • Close the trade as soon as a bullish divergence is indicated by the FX5 MACD Divergence indicator.
  • Close the trade as soon as price closes above the GMMA Long green line.

Regular Divergence Trend Reversal Forex Trading Strategy 3

Regular Divergence Trend Reversal Forex Trading Strategy 4

Conclusion

This strategy is a working trend reversal trading strategy.

Many traders use divergences to trade trend reversals. Traders even trade on strong established trends as long as there are strong indications of a trend reversal based on divergences.

Some traders trade even without the confirmation of a trend reversal based on the GMMA Long indicator. It does work but with a lower probability. On the upside, since the trade is taken much earlier, bigger profits are gained out of the trade.

Trading on the crossover of the GMMA Long indicator is a more conservative way of trading divergences and provides higher probability trade setups.

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