Arc Trend Reversal Forex Trading Strategy for MT5

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Arc Trend Reversal Forex Trading Strategy for MT5 2

Trend Reversals may provide decent trading opportunities for traders. Most traders trade trend reversals based on a break of a trendline moving along the direction of the trend. However, price action does not always move with a clear and straight trendline. This strategy may help traders identify trend reversal opportunities when price action is changing its trajectory.

Arc Indicator

The Arc Indicator is a custom technical indicator which was developed merely as a training tool for MT5 indicator programmers. It was not developed with the intention of being an actual technical indicator. However, if you would observe it closely, you would see that it does have the potential to help traders identify trend reversals coming from trending channels.

The Arc Indicator plots two lines which arc and bend according to the users preference, thus the name “Arc” Indicator. Users simply have to click the intended starting point of the first arcing line, the midpoint where the line should start to bend, and the opposite end point. Users should then drag and click where the next arcing line should be wherein price action would be enveloped by the two arcing lines.

Arc Trend Reversal Forex Trading Strategy for MT5

Users can adjust the arcing lines by clicking on it. Users can click on the starting point, midpoint, and the end point of each line to adjust the lines.

Price Action Trend and Trend Reversals

Price Action has a concrete method for identifying trend reversal which can be identified based on the pattern of the swing highs and swing lows.

Uptrend markets are defined by price action which plot swing highs that consistently breach above the prior swing high, and swing lows that never drop below the prior swing low.

Inversely, downtrend markets are identified by price action which plots swing lows that consistently drop below the prior swing low, and swing highs which never breach above the prior swing high.

These two types of trends tell us how price action patterns can help us objectively identify trending markets, but it does not end there. A break in these patterns can also be telltale signs of a possible trend reversal. A swing low dropping below a prior swing low in an uptrend market could mean a bearing trend reversal. On the other hand, a swing high breaching above the preceding swing high in a downtrend market could also mean a bullish trend reversal.

Flag and Pennant Patterns

Flag and Pennant Patterns are two of the most popular trend continuation price patterns that traders use. This is because these patterns do have a very high probability of resulting in a profitable trade.

Both Flag and Pennant Patterns are composed of a pole and a body. The difference is in the characteristics of its body. Flag Patterns have perpendicular bodies, while Pennant Patterns have bodies that tend to contract to a smaller point.

If you would look at the Flag and Pennant Patterns, you would realize that its pole is actually an initial momentum thrust or pulse, while its body is actually the pullback or congestion phase after the initial momentum pulse.

As traders see the initial momentum movement, many traders would try to jump back in on the trend hoping that price would continue. This often causes price action to breakout of the market congestion and start another momentum movement. This is why Flag and Pennant Patterns usually work.

Trading Strategy Concept

The idea behind this trading strategy is to use the Arc Indicator as a tool to help us identify the trajectory of the trend based on the swing highs and swing lows of price action. This should also help us identify points on the trend wherein price action is starting to break its trend pattern and might start to reverse. To do this, we should plot the Arc Indicator based on the swing highs and swing lows of price action. We then adjust the arcing lines as new swing highs and swing lows are formed. As soon as the swing highs and swing lows change trajectory, we would then easily identify a potential trend reversal.

As soon as we identify the potential trend reversal, we should then wait for the pullback which typically occurs after the initial momentum pulse in the direction opposite the prior trend. We then try to observe for potential flag and pennant patterns and trade it accordingly. The exit points of these trades would also be based on the arcing lines which is where price action may stall or bounce back from.

Buy Trade Setup

Entry

  • Identify a downtrend market based on swing lows that are dropping below the prior swing low, and swing highs not breaching above the prior swing high.
  • Plot and adjust the Arc Indicator lines based on the swing highs and swing lows.
  • Observe for a change in the trajectory of the trend based on price action and the Arc Indicator lines.
  • Observe for a bullish flag or pennant pattern.
  • Open a buy order as soon as price breaks the body of the bullish flag or pennant pattern.

Stop Loss

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

Exit

  • Close the trade as soon as price touches the upper arcing line.

Arc Trend Reversal Forex Trading Strategy for MT5 2

Sell Trade Setup

Entry

  • Identify an uptrend market based on swing highs that are breaching above the prior swing high, and swing lows not dropping below the prior swing low.
  • Plot and adjust the Arc Indicator lines based on the swing highs and swing lows.
  • Observe for a change in the trajectory of the trend based on price action and the Arc Indicator lines.
  • Observe for a bearish flag or pennant pattern.
  • Open a sell order as soon as price breaks the body of the bearish flag or pennant pattern.

Stop Loss

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

Exit

  • Close the trade as soon as price touches the lower arcing line.

Arc Trend Reversal Forex Trading Strategy for MT5 3

Conclusion

Most traders trade trend reversals based on price breaking a trending channel. However, price action does not always move in a straight trend or channel. The Arc Indicator may help traders trade trend reversals on such situations.

If you would also observe these patterns closely, you would notice that these patterns are somewhat cup and handle patterns and its inverse setup, which is an effective trend reversal pattern.

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