Although seemingly difficult to decipher, the market often gives us hints regarding its direction. However, this is often a difficult task for new traders to decipher. Some technical indicators may help us identify the next probable direction of the market more objectively. This strategy is an example of how we can use indicators to identify potential trend continuation entries as the market presents these opportunities.
Smoother Adaptive Indicator
The Smoother Adaptive Indicator is a momentum indicator which is a type of modified moving average. This modified moving average is closely related to the Jurik Research Moving Average (JMA). However, it is not exactly the same as the JMA indicator. Instead, it is a smoothened moving average derived from the JMA.
The classic Jurik Moving Average is in itself a modified moving average which attempts to create a moving average line that could eliminate market noise. In fact, it is somehow known as a superior noise elimination filter. This creates a moving average line which provides a smoothened representation of price action with a very high degree of responsiveness to price movements due to its minimal noise. However, some traders may find the JMA to be too jagged and erratic due to its responsiveness to price fluctuations. Thus the Smoother Adaptive Indicator was developed.
The Smoother Adaptive Indicator is simply a smoothened version of the JMA indicator. It plots a moving average line which is relatively smoother than the regular JMA line. In fact, it towards the side of smoothness rather than responsiveness. The belief is that since it is a smoothened version, it can be more reliable in pointing out momentum direction or bias.
The Smoother Adaptive Indicator plots a line which changes color depending on the direction of the momentum. It plots a line with a lime hue whenever it detects a bullish momentum, which may gradually change to an orange hue as the indicator starts to detect a bearish momentum.
Kumo Indicator
The Ichimoku Kinko Hyo indicator is in itself a complete momentum and trend direction indicator system which provides trend indications on a wide array of time horizons, from the short-term to the long-term. This is made possible because of the five different components of the Ichimoku Kinko Hyo indicator, namely the Tenkan-sen, Kijun-sen, Senkou Span A, Senkou Span B, and Chikou Span, each representing and indicating a trend direction on its own time window.
The Kumo, which literally translates to “cloud”, is composed of two of the main components of the Ichimoku Kinko Hyo indicator, namely the Senkou Span A and Senkou Span B line. Both these lines represent the long-term trend horizon of the Ichimoku Kinko Hyo system.
The Senkou Span A (Leading Span A) is the median of the Tenkan-sen and Kijun-sen lines shifted forward. It is calculated by adding the current Tenkan-sen and Kijun-sen values, dividing the sum by two, then shifting the plotting of its line value 26 periods forward.
The Senkou Span B (Leading Span B) line is simply the median of price over a 52-bar window shifted forward. Its algorithm detects the highest high and lowest low within a 52-bar window, adds the two values, divides the sum by two, then shifts the resulting value forward by 26 periods.
Together, these two lines form the Kumo. The algorithm shades the area between the two lines depending on the location of the Senkou Span A line in relation to the Senkou Span B line. It shades the area sandy brown whenever the Senkou Span A line is above the Senkou Span B line. Inversely, it shades the area thistle whenever the Senkou Span A line is below the Senkou Span B line.
This feature allows traders to easily identify the direction of the long-term trend. The Kumo indicates a bullish long-term trend whenever it is sandy brown and a bearish long-term trend whenever it is thistle.
Trading Strategy Concept
Smoother Adaptive Trend Continuation Forex Trading Strategy uses the Smoother Adaptive indicator as well as the Kumo to identify possible trend continuation market scenarios that the market may present.
The Kumo is mainly used as the long-term trend direction filter. The long-term trend direction can be objectively identified based on the color of the shade within the Kumo. Trade direction is then isolated based on the direction of the long-term trend as indicated by the Kumo.
The Smoother Adaptive indicator is then used to confirm momentum direction and as a trade entry signal. Momentum direction is based on the color of the Smoother Adaptive line, whether it has a lime or orange hue. Trades can only push through if the short-term momentum direction agrees with the long-term trend.
Price action is then allowed to pull back between the Smoother Adaptive line and the Kumo. Trade entry signals are viable as soon as price pops back out the Smoother Adaptive line while the momentum direction is still in confluence with the long-term trend.
Buy Trade Setup
Entry
- The Kumo should be sandy brown.
- The Smoother Adaptive line should have a lime hue.
- Price should pull back below the Smoother Adaptive line.
- Open a buy order as soon as price closes back above the Smoother Adaptive line.
Stop Loss
- Set the stop loss on the fractal below the entry candle.
Exit
- Close the trade as soon as price action shows signs of a bearish reversal.
Sell Trade Setup
Entry
- The Kumo should be thistle.
- The Smoother Adaptive line should have an orange hue.
- Price should pull back above the Smoother Adaptive line.
- Open a sell order as soon as price closes back below the Smoother Adaptive line.
Stop Loss
- Set the stop loss on the fractal above the entry candle.
Exit
- Close the trade as soon as price action shows signs of a bullish reversal.
Conclusion
This trading strategy is a simplified trend following strategy which is based on the concept of aligning the long-term trend with the short-term trend, which significantly increases the likelihood of a profitable trade.
This strategy is based on technical indicators. However, indicators do not cause price to move. Instead, it is the other way around. As such, it is best for traders to master price action and market flow, using these technical indicators only as a supplementary confirmation of what the market is indicating.
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