Linear Regression Cross Forex Trading Strategy

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Linear Regression Cross Forex Trading Strategy

Trend reversals are high yielding trade setups which can produce unlimited yields compared to the risk placed on each trade. Traders could find themselves in a trade that is a successful trend reversal and see their profits grow several times more than the risk on their stop loss. This is because trend reversal setups are usually open ended. Trend reversal traders often close the trade only when the trend is about to end.

One of the most popular ways traders identify potential trend reversals is with the use of a moving average crossover. Moving crossover signals are basically trend reversal signals generated whenever a faster moving average crosses a slower moving average. This occurs whenever the direction of price action trend is reversing. The faster moving average line responds faster to changes in the direction of average price movements. This dynamic causes the two moving average lines to cross over.

Moving average crossovers can be very effective in anticipating trend reversals. However, it is not that accurate. This is not because moving average crossovers are not effective. Rather, it is because anticipating that price action would reverse is very difficult as momentum is often on the side of the prior trend. However, traders still make money trading trend reversals because of the sheer size of the yields compared to the risk.

In this strategy, we would be looking at a simple crossover strategy which finds confluences with a complementary oscillating technical indicator.

Linear Regression Slope

The Linear Regression Slope (LRM) is an oscillating technical indicator which is used to help traders predict future price trajectory based on historical price values. It was developed from a quantitative perspective of identifying future price movements based on historical price data. This method which is an effective statistical method in predicting future data is similarly effective when applied in trading.

The Linear Regression Slope oscillator plots a line that oscillates freely around its midline zero. The line it plots is characteristically very smooth. This helps traders avoid too many false signals in a choppy market environment.

Trend direction using the Linear Regressions Slope is based on the location of its line in relation to its midline, zero. The trend bias is considered bullish if the Linear Regression Slope line is above zero, and bearish if it is below zero.

Consequently, trend reversal signals are identified based on the crossing over of the Linear Regression Slope line over its midline. Crosses above zero indicate a bullish trend reversal, while crosses below zero indicate a bearish trend reversal.

MA Alert

MA Alert is a custom trend following technical indicator which also acts as a trend reversal signal indicator.

This indicator is based on a modified moving average line. Its underlying moving average line can be modified based on several parameters, such as the type of moving average line, number of periods, shift to the left or right of the current period and the source of the price applied to the computation. This makes the underlying moving average line used by this indicator very adaptive to the type of trading strategy or trade setup that a trader is aiming for.

As a signal indicator, this indicator also objectively identifies trend reversals. It then sends an alert signal on the MT4 platform to inform the trader that the forex pair it is applied on might be reversing its trend.

Trading Strategy

Linear Regression Cross Forex Trading Strategy is a simple trend reversal crossover strategy which makes use of the MA Alert moving average line. It also produces trade setups based on a confluence of trend reversal signals coming from a moving average crossover and the Linear Regression Slope oscillator.

The crossover strategy is based on a 14-period MA Alert line and a 28-period Simple Moving Average (SMA). Trend reversal signals are generated as the MA Alert line crosses over the 28 SMA line.

The trend reversal should also be confirmed based on a confluence of another trend reversal signal coming from the Linear Regression Slope line. This is simply based on the crossing over of the LRM line over its median, zero.

Indicators:

  • MA_ALERT
    • MA Period: 14
  • Moving Average
    • Period: 28
    • MA Method: Simple
  • LinearRegSlope_v1

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

Currency Pairs: FX majors, minors and crosses

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • MA Alert line should cross above the 28 SMA line.
  • The Linear Regression Slope line should cross above zero.
  • Enter a buy order on the confluence of the trend reversal signals above.

Stop Loss

  • Set the stop loss on a support below the entry candle.

Exit

  • Close the trade as soon as the MA Alert line crosses below the 28 SMA line.
  • Close the trade as soon as the Linear Regression Slope line crosses below zero.

Linear Regression Cross Forex Trading Strategy

Linear Regression Cross Forex Trading Strategy 2

Sell Trade Setup

Entry

  • MA Alert line should cross below the 28 SMA line.
  • The Linear Regression Slope line should cross below zero.
  • Enter a sell order on the confluence of the trend reversal signals below.

Stop Loss

  • Set the stop loss on a resistance above the entry candle.

Exit

  • Close the trade as soon as the MA Alert line crosses above the 28 SMA line.
  • Close the trade as soon as the Linear Regression Slope line crosses above zero.

Linear Regression Cross Forex Trading Strategy 3

Linear Regression Cross Forex Trading Strategy 4

Conclusion

This simple trend reversal trading strategy can produce good trend reversal setups when used in the right type of market condition or forex pair.

Although this trend reversal strategy may not be as accurate as other trend-based strategies, it does have the capacity to produce high yielding trade setups. This is the factor that can help traders consistently become profitable over the long run.

However, strings of failed crossovers may cause some losses. It is wise to keep position sizing and money management in check when trading trend reversals.

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