Many traders are stuck with the idea that reversal setups are completely different from trend following and trend continuation setups. Although reversal strategies and trend following or trend continuation strategies usually reside on different ends of the spectrum, it does not necessarily mean that these two concepts can not be used in together.
The market moves in waves and pulses which vary in size and time horizon. Some trends tend to be short-term while others are long-term trends. A short-term trend on the higher time frames could also actually be a long-term trend on the lower timeframes. What seems like a reversal on the short-term could actually be just a pullback on a long-term trend.
Let us explore a strategy which exemplifies this. It is a trend continuation strategy based on the Super Trend indicator and the Relative Strength Indicator. At the same time, it also trades popular reversal candlestick patterns, which are the Hammer and Shooting Star patterns.
Super Trend Indicator (MT5)
Table of Contents
- 1 Super Trend Indicator (MT5)
- 2 Relative Strength Index (MT5)
- 3 Hammer and Shooting Start Patterns
- 4 Conclusion
The Super Trend indicator is a trend following indicator which is based on the use of the Average True Range (ATR) as a means to identify trend direction and trend reversals.
One concept many traders use to identify trend reversals is based on how price reverses against the current trend direction by a multiple of the ATR. The most commonly used multiple is three. For example, if the market is in an uptrend and price reverses against the uptrend by more than three times the ATR, then the market would now have reversed to a downtrend. Inversely, if the market is in a downtrend and price reverses up by more than three times the ATR, then the market would now have reversed to an uptrend.
The Super Trend indicator plots a line on the price chart based on the concept of trend direction in relation to the ATR as discussed above. In an uptrend, it plots a sky-blue line below price action which is shifted three times the ATR below the recent highest high. In a downtrend, it plots a tomato colored line above price action which is shifted three times the ATR above the lowest low. The line shifts whenever price closes on the opposite side of the line.
The Super Trend indicator is usually used as a trend reversal indicator. This is based on the Super Trend line shifting above or below price action. It can also be used as a trend direction filter. Traders can trade based on market pulses while trading in the direction of an established trend.
Aside from the usual uses mentioned above, the Super Trend line can also act as a dynamic area of support or resistance. Price can sometimes barely touch the Super Trend line and not close on the opposite side of the Super Trend line. Then, it starts to reverse.
We will use the Super Trend line both as a trend direction filter and as a dynamic support or resistance area where we will try to trade possible strong momentum pulses.
Relative Strength Index (MT5)
The Relative Strength Index (RSI) is a very popular oscillator type of technical indicator, which is also very versatile. It is mostly used to determine possible overbought and oversold price levels which are highly probable to result in a mean reversal. With a few tweaks, the RSI can also be used to indicate trend direction and momentum.
The RSI plots a line that mimics the movements of price action while oscillating in its own indicator window within the range of zero to 100.
The RSI range are also preset to have markers at level 30 and 70, which are used to determine overbought and oversold price levels. An RSI line dropping below 30 is indicative of an oversold market, while an RSI line breaching above 70 is indicative of an overbought market. Both scenarios are price conditions for a possible mean reversal.
Although these levels are mainly used to identify overbought and oversold price conditions, the RSI line tends to continue its direction when momentum is strong. This means that the RSI line tends to continue rising above 70 whenever there is a strong bullish momentum while in an uptrend. It also continues to drop below 30 when there is a strong bearish momentum in a downtrend.
Many traders also add levels 45, 50 and 55 to identify trend markets. The RSI line usually stays above 50 in an uptrend market while the level 45 acts as a support level for the RSI line. Inversely, the RSI usually stays below 50 in a downtrend market while the level 55 acts as a resistance for the RSI line.
We will mainly use the RSI to confirm the direction of the trend using the added levels 45, 50 and 55. However, we can also confirm if momentum is building up based on the RSI line breaching the 30 to 70 range.
Hammer and Shooting Start Patterns
The Hammer and Shooting Star patterns are popular reversal candlestick patterns used by many traders.
The Hammer pattern is composed of a candlestick with a very small body at the top end of the candle with a long wick at the bottom. This signifies that the market is rejecting price levels below the candle.
The Shooting Star pattern is a bearish reversal pattern composed of a candle with a very small body at the bottom end of the candle with a long wick at the top. This signifies that the market is rejecting price from above the candle.
We will be using the Candle Pattern Finder indicator to help us identify these patterns that form near the area of the Super Trend line.
Super Trend Rejection Bounce Setup – Buy
- Price action should be above the sky-blue Super Trend line.
- The RSI line should generally be above 45.
- Price should retrace near the Super Trend line.
- Enter a buy order as soon as the Candle Pattern Finder identifies a Hammer pattern.
- Set the stop loss below the entry candle.
- Close the trade as soon as the price closes below the Super Trend line.
Super Trend Rejection Bounce Setup – Sell
- Price action should be below the tomato colored Super Trend line.
- The RSI line should generally be below 55.
- Price should retrace near the Super Trend line.
- Enter a sell order as soon as the Candle Pattern Finder identifies a Shooting Star pattern.
- Set the stop loss above the entry candle.
- Close the trade as soon as the price closes above the Super Trend line.
Hammer and Shooting Star patterns forming on dynamic support and resistance lines such as the Super Trend line are usually indicative of price starting to reverse coming from a short pullback in a trending market. This strategy simply puts structure into such type of strategy.
It makes use of the confluence of the RSI and the Super Trend line to confirm the trend. It also uses the Candle Pattern Finder indicator to simplify the identification of the patterns.
Forex Trading Strategies Installation Instructions
Super Trend Rejection Bounce Forex Trading Strategy – 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 Rejection Bounce Forex Trading Strategy – 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 Rejection Bounce Forex Trading Strategy – MT5?
- Download Super Trend Rejection Bounce Forex Trading Strategy – 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 Rejection Bounce Forex Trading Strategy – MT5
- You will see Super Trend Rejection Bounce Forex Trading Strategy – 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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