Trend Slope Forex Trading Strategy

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Trend Slope Forex Trading Strategy

Remember the first time you saw a forex chart? Or any other trading chart for that matter? When we first start out trading all we see are meaningless bars that goes up and down a graph without any direction at all. Then we wonder how traders make money out of a nonsensical price movement. Then, as we go on our quest and learn about trading and technical analysis, we begin to see things. As we progress, we learn to identify what type of market we are in depending on how price moves. It could either be a range bound market, a trending market, a reversal, or just a choppy market.

Of all the market conditions mentioned above, many traders might agree that a trending market seems to be the most directional type of market condition. We see a trending market and we drool hoping we had entered in the market right at the beginning of the trend. If we just traded at the right moment and held on to the position, we could have had a huge profit. If only we had a way to predict the start of a trend.

Moving Average Behavior on Trending Markets

The moving average is one of the simplest, most basic indicators, yet it is also one of the most overlooked. Probably due to its simplicity, many traders either go wild with it or totally ignore its use, looking for something more complex.

One of the best uses for moving averages is during a trending market condition. The moving average has characteristics that are peculiar to it and are very useful during a trending market condition.

Individually, a moving average could determine the trend bias of the market based on its slope. This is because as price pushes further to a single direction, the moving average also slopes toward the direction of the trend. If the market is bullish, the moving average tends to slope upward. On the other hand, if the market is bearish, moving averages tend to slope downward.

Below is an example of a bullish and bearish market condition which caused the moving average to slope.

There are many more ways to determine the directional bias of the market or if the market is trending based on moving averages. Other uses could be crossovers of moving averages, fanning out of multiple moving averages, or even just the location of price in relation to a moving average filter. However, for this strategy we will focus mainly on the use of a moving average’s slope.

Trading Strategy Concept

As discussed earlier, moving averages have the tendency to slope during a trending market condition. For this reason, we will use this knowledge to our advantage.

We will be using the Slope Direction Line custom indicator as our main indicator. This indicator is based on a moving average which changes color based on the slope of the indicator. If the market has a bullish bias, the indicator turns light blue, while if the market has a bearish bias, then the indicator turns tomato color. We will be using this changing of color as both an entry trigger and filter.

In addition to the above custom indicator, we will also be using the TrendLineReg custom indicator. This indicator plots a histogram on a separate window based on its assessment of the trend. Positive histogram bars are said to be bullish while negative histogram bars are considered bearish. This will also serve as an entry trigger and filter in conjunction with the Slope Direction Line indicator. Buy trades are taken on the cross of the histogram bars above zero, while sell trades are taken as the histogram bars cross below zero.

Indicators

  • TrendLineReg
  • Slope Direction Line

Timeframe: preferrabley 5-min, 15-min, 30-min and 1-hour charts

Currency Pairs: any

Trading Session: any

Buy (Long) Trade Setup

Entry

  • The Slope Direction Line should be color light blue indicating that the market has a bullish bias
  • The TrendLineReg should cross above zero indicating that the market might be starting a bullish trend
  • Enter a buy market order on the confluence of the above conditions

Stop Loss

  • Set the stop loss on the swing low below the entry candle

Exit

  • Close the trade if the Slope Direction Line changes to tomato color
  • Close the trade if the TrendLineReg histogram bar crosses below zero

Sell (Short) Trade Setup

Entry

  • The Slope Direction Line should be color tomato indicating that the market has a bearish bias
  • The TrendLineReg should cross below zero indicating that the market might be starting a bearish trend
  • Enter a sell market order on the confluence of the above conditions

Stop Loss

  • Set the stop loss on the swing high above the entry candle

Exit

  • Close the trade if the Slope Direction Line changes to light blue color
  • Close the trade if the TrendLineReg histogram bar crosses above zero

Conclusion

This strategy allows traders to catch big trend moves as the market reverses and starts to trend towards the opposite direction. This is done by using the two custom indicators which is based on trends.

It is also based on the intermediate-long-term trend using 100 periods as a basis for the Slope Direction Line indicator. This allows traders to catch longer lasting trends and avoids premature exits which is common on shorter period moving averages. The disadvantage however is that the entries could be a little late as compared to shorter period moving averages.

This strategy could allow for higher reward-risk ratio because it allows traders to enter the trade near the start of the trend and exit the trade when the trend is confirmed to have ended. However, there will be trades that might only breakeven or cause a loss. This is due to the fact that during choppy markets, false signals may be generated. Use this strategy only on conditions where the market has a tendency to trend and avoid using it on choppy markets.

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