One way traders identify trend reversals is with the use of the ATR. The theory is that price action should not move against the current trend or momentum direction by more than the preset threshold multiple of the ATR. If price action does reverse against the current trend or momentum direction at a degree higher than the threshold, then the trend or momentum is considered to have reversed.
To do this, traders typically set a multiple of the ATR, which is usually set as twice the ATR. If price reverses against the current trend by more than twice the ATR, then the market trend is considered to have reversed. It also follows that traders may identify the trend or momentum direction based on the latest trend direction indication.
This concept, which uses the ATR as a basis for identifying trends is very effective. However, this is quite difficult to do manually since this would require traders to constantly measure the distance between price action and the threshold. The classic Super Trend Indicator simplifies this method by automatically plotting the line representing the price level which price has to breach based on the ATR threshold. This line is called the Super Trend line. The Super Trend line then automatically shifts on the opposite side of price action whenever price closes on the other side of the Super Trend line and also typically changes color to indicate a trend or momentum reversal.
This strategy is based on the concept of using the ATR to identify trend reversals using the Super Trend Averages Indicator as its main trend reversal signal indicator.
Super Trend Averages Indicator
Table of Contents
- 1 Super Trend Averages Indicator
- 2 Ichimoku Kinko Hyo – Kumo
- 3 Trading Strategy Concept
- 4 Conclusion
The Super Trend Averages Indicator is a trend following indicator which is based on the concept of using the Average True Range (ATR) as a basis for identifying trend direction. It is a modification of the classic Super Trend Indicator, which instead of plotting a line based on price action, it plots a line based on a short-term moving average line. This indicator is preset to use the Hull Moving Average (HMA) at a 12-bar calculation, also using the median price as the price point used for the calculation. It is also preset to use an ATR of 12 periods and an ATR multiplier of 0.66.
Since this indicator is set at a multiplier of 0.66, the line it produces tends to lean more towards the short-term trend or momentum indication. However, these variables can be modified to fit each trader’s needs.
Ichimoku Kinko Hyo – Kumo
The Ichimoku Kinko Hyo Indicator is one of the few indicators which can be considered as a complete trend following system. This is because the Ichimoku Kinko Hyo Indicator has several elements each of which can represent various trend and momentum horizons.
The Ichimoku Kinko Hyo Indicator is composed of five lines, the Tenkan-sen or Conversion Line, the Kijun-sen or Base Line, the Chikou Span or Lagging Span, the Senkou Span A or Leading Span A, and the Senkou Span B or Leading Span B.
The Tenkan-sen and Kijun-sen lines are often used as a pair to objectively identify the short-term trend direction, as well as its corresponding reversals. The Chikou Span is basically the close of price which is lagging by 26 bars.
Despite being called as the “Leading Span” lines, the Senkou Span A and Senkou Span B are also used as a pair to form the Kumo or “Cloud”, which indicates the long-term trend direction.
The Senkou Span A line is calculated as the average of the Kijun-sen and Tenkan-sen lines shifted 26 periods ahead.
The Senkou Span B line on the other hand is calculated as the median of price over a 52 period window shifted 26 periods ahead.
The long-term trend direction is identified based on how the two lines stack up. The long-term trend is bullish whenever the Senkou Span A is above the Senkou Span B, and bearish whenever the Senkou Span A is below the Senkou Span B. The area between the two lines is also shaded to indicate trend direction. It is shaded sandy brown to indicate a bullish long-term trend, and thistle to indicate a bearish long-term trend.
Trading Strategy Concept
This trading strategy is a simple trend following strategy which trades on the confluence of the long-term trend and the short-term trend.
The Kumo is used to identify the long-term trend. This is based on how the two Kumo lines stack up and the color of the area between the two lines. Trades are taken exclusively in the direction of the long-term trend.
The Super Trend Averages Indicator is used as the short-term trend or momentum reversal signal indicator. Trades are opened whenever the lines shift around price action and its color changes indicating a confluence in trend direction with the Kumo trend.
Buy Trade Setup
- Price action should be above the Kumo and the Kumo should be sandy brown indicating a bullish long-term trend.
- Open a buy order as soon as the Super Trend Averages Indicator shifts below price action and changes to lime green.
- Set the stop loss on the support below the entry candle.
- Close the trade as soon as price closes below the Super Trend Averages line.
Sell Trade Setup
- Price action should be below the Kumo and the Kumo should be thistle indicating a bearish long-term trend.
- Open a sell order as soon as the Super Trend Averages Indicator shifts above price action and changes to pale violet red.
- Set the stop loss on the resistance above the entry candle.
- Close the trade as soon as price closes above the Super Trend Averages line.
Super Trend Averages Long-Term Trend Continuation Strategy is a decent trend following strategy. It not perfectly accurate. There will be times when the reversal signals would not produce a profitable trade. However, because there are also many profitable trades that could produce yields which are significantly higher than the risk on the stop loss, yields are typically higher than the losses. This creates the potential for traders to be consistently profitable on the long run.
Forex Trading Strategies Installation Instructions
Super Trend Averages Long-Term Trend Continuation Strategy for MT5 is a combination of Metatrader 5 (MT5) indicator(s) and template.
The essence of this forex strategy is to transform the accumulated history data and trading signals.
Super Trend Averages Long-Term Trend Continuation Strategy for MT5 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 Super Trend Averages Long-Term Trend Continuation Strategy for MT5?
- Download Super Trend Averages Long-Term Trend Continuation Strategy for MT5.zip
- *Copy mq5 and ex5 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 Super Trend Averages Long-Term Trend Continuation Strategy for MT5
- You will see Super Trend Averages Long-Term Trend Continuation Strategy for MT5 is available on your Chart
*Note: Not all forex strategies come with mq5/ex5 files. Some templates are already integrated with the MT5 Indicators from the MetaTrader Platform.
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