Trend Reversal strategies are probably the more difficult types of trading strategies. This is because trend reversals assume that traders could correctly guess when the trend would end and time the reversal accurately. Guessing a market trend’s reversal is very hard to do. Trends usually have momentum behind it. Like anything else, stopping an object with momentum behind it is difficult. However, it could be done.
So, how do you intelligently time the reversal of a market? It is by using tools that would help you identify if the market is near its peak or trough. This is because whenever the market trend is near its peak or trough, momentum tends to slow down. Think of it this way, if you would throw a ball up in the air you applied momentum behind the ball. However, as the ball is nearing its peak the vertical momentum that it has starts to slow down. The next thing you would observe is that the ball would completely reverse and accelerate its fall. The same is true with trading. As price reaches its peak, momentum fades and then it reverses. The key is in having a tool that would help us assess if price is nearing or is at its peak. Then, as the trend starts to reverse, we use another tool to assess if price’s reversal is picking up.
Money Flow Reversal Forex Trading Strategy makes use of a mean reversal indicator to assess if price is at its peak and a trend following indicator to confirm the trend reversal.
Money Flow Index
Table of Contents
Money Flow Index (MFI) is an oscillating indicator which identifies oversold and overbought market conditions. It is a bounded oscillating indicator which ranges from zero to 100. Traders usually make use of the 20 – 80 range as the normal range. Whenever the MFI line falls below 20, traders would usually consider the market as oversold. On the other hand, the market is also usually considered overbought whenever the MFI line goes over 80.
The MFI is much like many other oscillating indicators such as the Relative Strength Index (RSI). They have the same characteristics and are bounded oscillating indicators which allow traders to read overextended market conditions. However, they defer in one thing, the incorporation of volume. While the RSI computes oscillations based on price movement alone, the MFI includes volume in its computation. We could say that the MFI is much like a volume weighted RSI.
When considering trends and trend reversals, momentum is very important. Momentum is composed of two variables, volume and price or the speed of price changes. Given that volume should be considered when looking at momentum, MFI might give a more complete picture as a momentum-based oscillating indicator.
The Fisher Indicator
The Fisher Indicator is a trend following oscillating indicator which indicates the trend using histogram bars. Positive histograms are colored lime and indicates a bullish market condition, while negative histograms are colored red and indicates a bearish market condition.
The Fisher Indicator is a probability-based indicator. It assumes that the probability of price going a certain direction is not equal. It assumes that price tends to move towards the direction of the trend more often than against it. The Fisher indicator tends to be a very good indicator for determining the general mid-term trend direction. It does not change too often, yet at the same time it is not too lagging as compared to other indicators. With the right parameters, the Fisher Indicator usually shows reversal signals at approximately the same time as when momentum candles break diagonal supports and resistances, which are typical during trending market conditions.
This trading strategy is a trend reversal trading strategy which is initiated by an overextension of a trend.
To identify possible mean reversal entry setups, we will be making use of the Money Flow Index indicator. Trade setups that are not initiated by an overextended market condition as indicated by the Money Flow Index should be filtered out. Bullish trend reversals should begin from when the market is at an oversold condition, while bearish trend reversals should begin from overbought conditions.
Then, as the overextended conditions are met, we wait for the confirmation of a trend reversal using the Fisher Indicator. Entry signals are generated by the crossing over of the histogram bars or its changing of colors. The trade direction should be in agreement with the direction of the MFI mean reversal trade setup.
- ExtMFIPeriod: 14
- Applied_price: 5
- RangePeriods: 24
Timeframe: 1-hour, 4-hour and daily charts
Currency Pairs: major and minor pairs
Trading Session: Tokyo, London and New York sessions
Buy Trade Setup
- The MFI line should go below 20 indicating an oversold market condition
- The Fisher indicator should crossover above zero and change to lime indicating a bullish trend reversal
- These reversal conditions should be somewhat close to each other
- Enter a buy order at the confluence of the above conditions
- Set the stop loss at the support level below the entry candle
- Close the trade as soon as the Fisher indicator changes to red
Sell Trade Setup
- The MFI line should go above 80 indicating an overbought market condition
- The Fisher indicator should crossover below zero and change to red indicating a bearish trend reversal
- These reversal conditions should be somewhat close to each other
- Enter a sell order at the confluence of the above conditions
- Set the stop loss at the resistance level above the entry candle
- Close the trade as soon as the Fisher indicator changes to lime
The Money Flow Reversal Forex Trading Strategy is an excellent trading strategy which combines both mean reversal and momentum trading.
Mean Reversal trading strategies tend to have higher returns once the reversal results into a new trend. But how do we get to anticipate mean reversal trade setups that could result to a new trend? This trading strategy does that. It anticipates mean reversals using the MFI indicator and confirms the new momentum based trend using the Fisher indicator.
Forex Trading Strategies Installation Instructions
Money Flow Reversal Forex Trading Strategy is a combination of Metatrader 4 (MT4) indicator(s) and template.
The essence of this forex strategy is to transform the accumulated history data and trading signals.
Money Flow Reversal Forex Trading Strategy provides an opportunity to detect various peculiarities and patterns in price dynamics which are invisible to the naked eye.
Based on this information, traders can assume further price movement and adjust this strategy accordingly.
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How to install Money Flow Reversal Forex Trading Strategy?
- Download Money Flow Reversal Forex Trading Strategy.zip
- *Copy mq4 and ex4 files to your Metatrader Directory / experts / indicators /
- Copy tpl file (Template) to your Metatrader Directory / templates /
- Start or restart your Metatrader Client
- Select Chart and Timeframe where you want to test your forex strategy
- Right click on your trading chart and hover on “Template”
- Move right to select Money Flow Reversal Forex Trading Strategy
- You will see Money Flow Reversal Forex Trading Strategy is available on your Chart
*Note: Not all forex strategies come with mq4/ex4 files. Some templates are already integrated with the MT4 Indicators from the MetaTrader Platform.
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