Imagine an athlete with a large elastic band wrapped around his or her waist. Now, imagine that athlete trying to run as fast and as strong as possible. As the athlete goes farther from his or her starting point, the harder it will be to run. Sooner or later that person would be forced back.
The same thing happens with price. Price would often run and rally to a certain direction. As price moves farther from the average price, traders, brokers and other market participants would start to see that price is either too expensive or too cheap. It then forces price back to the mean. This is called Mean Reversal.
Mean Reversal or Mean Reversion is a theory that suggests that, all else equal, price would eventually return to its mean after a rally or a drop. If price is on an all time high, sooner or later traders would see price to be too expensive and consider it a good time to sell, bringing price back down. On the flip side, if price is on an all time low, traders would soon see it as a bargain and start buying the asset, pushing price back up.
However, there are instances when Mean Reversals are only a pre-requisite to a longer reversal. During these scenarios, price would reverse, pass the mean price, and trend much longer to the opposite direction.
The RSI LWMA Reversal Forex Trading Strategy initiates its trades based on Mean Reversal conditions. These Mean Reversals are based on a custom oscillating indicator and confirmed by a trend reversal signal.
Table of Contents
Laguerre RSI is a modified version of the classic RSI.
The Relative Strength Index (RSI) is an oscillating technical indicator which observes for momentum based on price changes. It is plotted as an oscillating indicator ranging from 0 to 100. As a bounded indicator, the RSI can identify trend bias as well as an overextension of price, whether overbought or oversold.
John F. Ehlers attempted to improve on the classic RSI by adding filters. This smoothens the response of the indicator and decreases the noise which is prevalent during choppy market conditions. The result is the Laguerre RSI (LRSI).
LWMA Crossover Signal
The LWMA Crossover Signal is a custom technical indicator based on the Linear Weighted Moving Average (LWMA).
Basic moving averages do not consider the importance of recent prices compared to past prices. Moving averages such as a Simple Moving Average (SMA) places the same weight on all price points. This creates a lagging moving average line which takes a little longer to respond to price changes.
The Linear Weighted Moving Average (LWMA) attempts to counter this drawback by putting more weight on recent prices. The result is a moving average line which is more responsive to price changes thereby significantly decreasing the lag.
LWMA Crossover Signal provides trade entry signals based on the crossover of two LWMA lines. The indicator then places an arrow on the candle where it detects a crossover, indicating a probable trend reversal.
This trading strategy is a simple mean reversal strategy that provides trade signals based on mean reversal signals coming from the Laguerre RSI indicator.
Price is considered overextended whenever the Laguerre RSI line is beyond the 0.15 to 0.75 range. A Laguerre RSI line below 0.15 is considered oversold, while a Laguerre RSI line above 0.75 is considered overbought.
During a trending condition, the Laguerre RSI line would often stay outside of the 0.15 to 0.75 range. However, as price becomes more overextended, the probability of a mean reversal increases. Price is considered reversing whenever the Laguerre RSI line hooks back and crosses back within the range.
The reversal is then confirmed by the LWMA Crossover Signal indicator. This means that the LWMA Crossover Signal indicator should confirm the mean reversal signal coming from the Laguerre RSI indicator. Reversal signals should also be closely aligned to confirm that the trend reversal signal has momentum behind it.
- FasterLWMA: 14
- SlowerLWMA: 19
- Laguerre RSI
- gamma: 0.8
Preferred Time Frames: 1-hour and 4-hour charts
Currency Pairs: major and minor pairs
Trading Session: Tokyo, London and New York sessions
Buy Trade Setup
- The Laguerre RSI line should be below 0.15 indicating an oversold condition.
- The Laguerre RSI line should cross back above 0.15 indicating a probable mean reversal scenario.
- The LWMA Crossover Signal indicator should print an arrow pointing up.
- These bullish signals should be closely aligned.
- Enter a buy order on the confirmation of the conditions above.
- Set the stop loss on the fractal below the entry candle.
- Close the trade as soon as the LWMA Crossover Signal indicator prints an arrow pointing down.
Sell Trade Setup
- The Laguerre RSI line should be above 0.75 indicating an overbought condition.
- The Laguerre RSI line should cross back below 0.75 indicating a probable mean reversal scenario.
- The LWMA Crossover Signal indicator should print an arrow pointing down.
- These bearish signals should be closely aligned.
- Enter a sell order on the confirmation of the conditions above.
- Set the stop loss on the fractal above the entry candle.
- Close the trade as soon as the LWMA Crossover Signal indicator prints an arrow pointing up.
This trading strategy on its own is already a viable trading strategy that could produce good gains on many of its trades. Compared to most trend reversal strategies, this strategy has a relatively high win probability.
Using this strategy in conjunction with other technical analysis strategies would improve trading performance much better. Technical analysis such breakouts and breakdowns of supports and resistances, or divergences could be a supporting thesis for this strategy.
Forex Trading Strategies Installation Instructions
RSI LWMA 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.
RSI LWMA 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 RSI LWMA Reversal Forex Trading Strategy?
- Download RSI LWMA 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 RSI LWMA Reversal Forex Trading Strategy
- You will see RSI LWMA 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.
Click here below to download: