Trend continuations are market scenarios where the price is indicating that it will continue in the direction of the trend, which typically occurs after a pullback. These scenarios provide excellent trading opportunities with high strike rates and great risk-reward ratios. As such, traders often have a trend continuation strategy in their arsenal.
The strategy that we are about to discuss is an example of a trend continuation strategy. This strategy uses two indicators, which are the Heiken Ashi Smoothed and T3 Moving Average Alarm indicators.
Heiken Ashi Smoothed
Heiken Ashi Smoothed is a trend-following indicator that is based on the concept of using the average prices within a price bar to arrive at a modified moving average calculation of each point. It is no coincidence that this indicator is named Heiken Ashi Smoothed. This is because the word “Heiken Ashi” means “average bars” when translated from Japanese.
The Heiken Ashi Smoothed indicator also shares some similarities with the Heiken Ashi Candlesticks. This is because both indicators use the same concept of calculating values based on the averages of a price bar. Just like the Heiken Ashi Candlesticks, the Heiken Ashi Smoothed indicator also plots candlestick-like bars that change color to indicate the direction of the trend.
Their difference lies in the fact that the Heiken Ashi Candlesticks are intended to modify how a price candle is drawn, while the Heiken Ashi Smoothed indicator was developed as a modified moving average. The Heiken Ashi Smoothed indicator somehow calculates for the moving average of the modified price point on the Heiken Ashi Candlesticks. In a way, the Heiken Ashi Smoothed indicator is like a moving average line derived from the Heiken Ashi Candlesticks.
This version of the Heiken Ashi Smoothed indicator plots lime green bars to indicate a bullish trend bias and dark orange bars to indicate a bearish trend bias. It is also preset to calculate for a 7-bar Linear Weighted Moving Average (LWMA). You may however modify these parameters according to your preferences. For the Smoothing Method, you may choose between a Simple Moving Average (SMA), Exponential Moving Average (EMA), Smoothed Moving Average (SMMA), or Linear Weighted Moving Average (LWMA).
As for the preset that we are using, we have modified the input variables to a 50 LWMA setting. This creates a smooth-moving average line that is very reliable in pointing the direction of the intermediate-term trend.
T3 Moving Average Alarm
The T3 Moving Average Alarm Indicator is a momentum reversal signal indicator based on the Triple Exponential Moving Average (T3 MA).
The original T3 Moving Average was developed by Tim Tillson as an attempt to create a smoother and hence more reliable moving average line. His idea was to create a moving average line with a smoothing effect by creating a 3-stage calculation process. To do this, he used the Exponential Moving Average (EMA) as the basis for its calculations. He then proceeds to the second step by computing another EMA using the values from the original EMA. Calculating up to this step produces the Double Exponential Moving Average (DEMA). However, he went further by calculating for the T3 using the values derived from the first and second EMA values. This step is rather complex. However, if you are interested in the underpinnings behind the T3 Moving Average, then here are the formulas for you.
- EMA1 = EMA (x, Period)
- EMA2 = EMA (EMA1, Period)
- GD = EMA1 * (1 + vFactor)) – (EMA2 * factor)
- T3 = GD (GD (GD (t, Period, vFactor), Period, vFactor), Period, vFactor)
This formula results in values that create a smoother moving average line when compared to other moving average lines.
The T3 Moving Average Alarm Indicator however does not plot a moving average line on the price chart. Instead, this indicator detects momentum reversals based on the crossing over of the value of the closing price and the value of the underlying T3 Moving Average.
This indicator plots a dodger blue arrow pointing up whenever the price closes higher than its underlying T3 Moving Average value. On the other hand, it also plots a red arrow pointing down whenever the price closes lower than its underlying T3 Moving Average value. These arrows indicate the direction of the detected momentum reversal.
Trading Strategy Concept
This trading strategy is a trend continuation strategy that trades on the confluence between the intermediate-term trend and short-term momentum reversals. This scenario occurs after a short pullback which is typical in a trending market. With that said, the two indicators mentioned above are essential tools for implementing this strategy.
The Heiken Ashi Smoothed indicator is used both as a trend direction filter and as a dynamic area of support or resistance. Trend direction is identified based on the color of the Heiken Ashi Smoothed bars. Price is then allowed to pull back towards it. From there, we can then start to observe the entry signal.
The entry signal will come from the T3 Moving Average Signal indicator. This is indicated by the arrows pointing in the same direction as indicated by the Heiken Ashi Smoothed bars.
Buy Trade Setup
Entry
- The Heiken Ashi Smoothed Bars should be lime green.
- Price should pull back towards the Heiken Ashi Smoothed bars.
- Open a buy order as soon as the T3 Moving Average Alarm indicator plots a dodger blue arrow pointing up.
Stop Loss
- Set the stop loss below the arrow.
Exit
- Close the trade as soon as the T3 Moving Average Alarm indicator plots a red arrow pointing down.
Sell Trade Setup
Entry
- The Heiken Ashi Smoothed Bars should be dark orange.
- Price should pull back towards the Heiken Ashi Smoothed bars.
- Open a sell order as soon as the T3 Moving Average Alarm indicator plots a red arrow pointing down.
Stop Loss
- Set the stop loss above the arrow.
Exit
- Close the trade as soon as the T3 Moving Average Alarm indicator plots a dodger blue arrow pointing up.
Conclusion
Trend continuation strategies are a staple among most seasoned retail traders. This is because it usually has a good win rate given that trades are taken in the direction of the trend.
If you are interested in learning a trend continuation strategy based on objective rules, then download these indicators and study how you can trade with the trend.
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