TDI Plus Reversal Forex Trading Strategy

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TDI Plus Reversal Forex Trading Strategy

“Do not chase price!” This is probably one of the most popular mantras of many traders. However, many momentum traders are guilty of doing this again and again. In fact, this is probably ingrained in their trading strategies. Some momentum strategies have trading plans that is susceptible to chasing price.

On the flip side, trade setups that could potentially cause momentum traders to lose money could also mean profits for contrarians. These are traders who look for reversals whenever they see that the market is overextended in a certain direction.

Contrarians are the exact opposite of momentum traders. While momentum traders trade in the direction of a strong momentum, contrarians try to anticipate reversals coming from an overextended trend or momentum.

Trading against the trend is counter intuitive. In fact, it is also considered equally risky because traders tend to try to pick tops and bottoms, which are very difficult to anticipate.

Still, despite the risks, many traders have also made huge profits trading counter trends. This is because at times, if picked at the right time, reversals could result in huge yields coming from a single trade.

TDI Plus Reversal Forex Trading Strategy is a reversal trading strategy that trades against an overextended trend or momentum. It systematically identifies overextended prices and confirms reversals based on two technical indicators.

TDI Plus

TDI Plus is a modified version of the Trader’s Dynamic Index (TDI).

It is a versatile technical indicator which can provide a lot of information on its own. It provides information regarding trend direction and trend reversals, as well as overbought or oversold market conditions.

TDI Plus is an oscillator that combines the Relative Strength Index and Bollinger Bands into one indicator. It is composed of five lines which provide different information.

The green line is the RSI line. It is a modified RSI line adjusted to fit the range of the TDI Plus indicator. It is paired with a signal line, which is the red line. The signal line is basically a moving average derived from the RSI line. Short-term trend reversals or momentum could be derived based on the crossing over of the RSI line and the signal line.

TDI Plus also has a Bollinger Band incorporated. The midline of the Bollinger Band, which is the yellow line, is a moving average line derived from the RSI. The outer lines, colored aqua, are standard deviations derived from the midline.

Having the RSI line above the yellow line indicates a bullish trend bias, while having the RSI line bellow the yellow indicates a bearish trend bias.

Trend reversal signals based on the RSI line and the signal line, occurring while price is reversing from an overextended condition based on the outer lines of the Bollinger Bands tends to have higher probabilities.

Heiken Ashi Candlesticks

Heiken Ashi in Japanese literally means “average bars”. This is basically what Heiken Ashi Candlesticks are.

Heiken Ashi Candlesticks is a technical indicator developed to present price charting in a different manner. It modifies the basic Japanese candlesticks in order to indicate the short-term trend much clearly based on the average price.

Regular Japanese candlesticks plot the high, low, open and close of price as is. This gives traders an idea regarding the behavior of the market based on how the market reacted to price movements.

Heiken Ashi Candlesticks on the other hand uses the same high and low, yet it modifies the open and close of the candle based on the average historical prices. This creates a smoothened-out chart with candles that change color only when the short-term trend reverses. It still retains the same highs and lows of the candle, which is very useful for identifying price action swings.

Trading Strategy

This trading strategy is a reversal strategy based on the TDI Plus indicator.

To trade this strategy, we should wait for price to be either overbought or oversold based on the RSI line of the TDI Plus indicator going outside of its Bollinger Bands. We then wait for price to reverse which should cause the RSI line and its signal line to crossover hooking back to the Bollinger Bands.

The conditions above should coincide with the Heiken Ashi Candlesticks to change color. If this confluence occurs, we then place a stop entry order on the high or low of the Heiken Ashi Candlestick. Price breaking the high or low of the Heiken Ashi Candlestick should confirm the reversal, which should also trigger our trade entries.

Indicators:

  • Heiken Ashi
  • !btmm_TDI_Plus

Preferred Time Frames: 15-minute, 30-minute, 1-hour and 4-hour charts

Currency Pairs: FX majors, minors and crosses

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • The RSI line of the TDI Plus indicator should be below the lower outer line of the Bollinger Bands.
  • The RSI line should cross above the signal line.
  • The Heiken Ashi Candlestick should change to spring green.
  • Place a buy stop order on the high of the Heiken Ashi Candlestick.

Stop Loss

  • Set the stop loss on the fractal below the entry candle.

Exit

  • Trail the stop loss two candlesticks behind until stopped out in profit.
  • Close the trade as soon as the Heiken Ashi Candlestick changes to red.

TDI Plus Reversal Forex Trading Strategy

TDI Plus Reversal Forex Trading Strategy 2

Sell Trade Setup

Entry

  • The RSI line of the TDI Plus indicator should be above the upper outer line of the Bollinger Bands.
  • The RSI line should cross below the signal line.
  • The Heiken Ashi Candlestick should change to red.
  • Place a sell stop order on the low of the Heiken Ashi Candlestick.

Stop Loss

  • Set the stop loss on the fractal above the entry candle.

Exit

  • Trail the stop loss two candlesticks behind until stopped out in profit.
  • Close the trade as soon as the Heiken Ashi Candlestick changes to spring green.

TDI Plus Reversal Forex Trading Strategy 3

TDI Plus Reversal Forex Trading Strategy 4

Conclusion

Trading reversals coming from a strong momentum is a very difficult type of trading strategy. However, there are many traders who have successfully traded this way, making thousands of dollars every day. This is because trading such reversals usually mean having a high yield potential.

However, it is also guilty of trying to catch tops and bottoms, which is a very difficult task. It takes a lot of practice trading this way and a feel for how the market moves.

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