MA Ribbon Divergence Reversal Forex Trading Strategy for MT5

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MA Ribbon Divergence Reversal Forex Trading Strategy for MT5 - Buy Trade

Moving average crossovers are one of the most popular types of trend reversal trading strategy. This is probably because of its simplicity. Anyone can implement it easily since traders are making their trade decisions solely based on the crossing over of two moving average lines. However, moving average crossovers are not always accurate.

Divergences based on the MACD on the other hand is also a popular reversal trading strategy often used by professional traders. However, many traders recognize that the MACD can often be too lagging. As such, many would opt to find a variant of the MACD that has lesser lag.

This trading strategy combines the two concepts, moving average crossover and divergences based on the MACD, using two customized indicators that has lesser lag relative to the basic indicators.

MA Ribbon Indicator

The MA Ribbon Indicator is a trend following technical indicator which is based on the concept of moving average crossovers, thus the initials “MA”.

One of the ways traders identify trend direction and trend reversals is with the use of a moving average pair, wherein one of the moving average lines moves faster than the other. Trend direction is then interpreted based on how the two moving average lines overlap. The trend is bullish whenever the faster moving average line is above the slower moving average line and bearish whenever they are stacked inversely.

In effect, trend reversals can also be identified based on the crossing over of the two moving average lines. A bullish trend reversal is indicated whenever the faster moving average line crosses above the slower moving average line. Inversely, a bearish trend reversal is indicated whenever the faster moving average line crosses below the slower moving average line. This is called a moving average crossover.

The MA Ribbon Indicator is based on this concept. It plots two moving average lines which can be modified within the indicator settings. It then shades the area between the two lines to indicate the direction of the trend. It shades the area deep sky blue to indicate a bullish trend, and sandy brown to indicate a bearish trend.

MA Ribbon Indicator

This indicator can be used as a trend direction filter wherein traders can opt to trade only in the direction indicated by the color of the MA Ribbon area.

It can also be used as a trend reversal entry signal wherein traders would open a trade in the direction of the trend reversal as soon as the color of the MA Ribbon shade changes. This indicator is also effective for this purpose as it can also send alerts and push notifications whenever the moving average lines crosses.

MACD 2 Indicator

The MACD 2 Indicator is a momentum-based oscillator which is derived from the classic Moving Average Convergence and Divergence (MACD) Indicator.

The classic MACD is a very popular momentum-based oscillator. However, it is also known to have significant lag. The MACD 2 Indicator was developed for the purpose of producing a MACD oscillator that has a reduced lag, which aligns more closely with the oscillations of price action.

Similar to the regular MACD, the MACD 2 Indicator calculates for the difference between two moving average lines, one being faster than the other. It then plots the difference as the MACD line. It also calculates for the moving average of the MACD line and plots it as the signal line paired with the main MACD line. The area between the two lines, called the MACD Cloud, is then shaded based on how the two lines overlap. It shades the MACD Cloud lime whenever the MACD line is above the signal line, indicating a bullish momentum, and deep pink whenever the MACD line is below the signal line, indicating a bearish momentum.

It also calculates for the difference between the MACD line and the signal line and plots histogram bars based on the difference. The color of the bars also changes depending on the value of the current bar compared to the prior bar. It plots a blue bar to indicate a strengthening bullish momentum, a deep sky blue bar to indicate a weakening bullish momentum, a brown bar to indicate a strengthening bearish momentum, and a violet bar to indicate a weakening bearish momentum.

MACD 2 Indicator

Trading Strategy Concept

This trading strategy is a reversal trading strategy which trades on the confluence of a trend reversal signal coming from the MA Ribbon Indicator and a divergence between the MACD 2 Indicator and price action.

First, we are to observe for possible divergences, this can be identified based on a variance of intensity between the swing highs and swing lows of price action compared to the peaks and dips on the MACD 2 oscillations. Traders simply have to compare the current peaks and dips with the preceding peaks and dips on the MACD 2 oscillator and price action.

As soon as the divergence is confirmed, we then wait for the MA Ribbon Indicator to change color confirming the trend reversal, which would be our trade entry signal.

Buy Trade Setup

Entry

  • Compare the swing lows of price action with the dips of the MACD 2 oscillations and observe for a possible bullish divergence.
  • The MACD Cloud should change to lime.
  • Open a buy order as soon as the MA Ribbon shade changes to deep sky blue.

Stop Loss

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

Exit

  • Close the trade as soon as the MA Ribbon shade changes to sandy brown.

MA Ribbon Divergence Reversal Forex Trading Strategy for MT5 - Buy Trade

Sell Trade Setup

Entry

  • Compare the swing highs of price action with the peaks of the MACD 2 oscillations and observe for a possible bearish divergence.
  • The MACD Cloud should change to deep pink.
  • Open a sell order as soon as the MA Ribbon shade changes to sandy brown.

Stop Loss

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

Exit

  • Close the trade as soon as the MA Ribbon shade changes to deep sky blue.

MA Ribbon Divergence Reversal Forex Trading Strategy for MT5 - Sell Trade

Conclusion

This trading strategy has the potential to provide trade signals that would result in a long running trend. These types of trades can produce high yielding trades that would significantly improve the risk reward ratio statistics of an account.

Traders should practice this strategy first before implementing it on a live account for them to effectively identify the correct divergence based reversal signals.

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