Trend reversal setups could be some of the most satisfying trade setups that a trader could trade if done right. This is because it usually allows traders to profit so much while risking so little. Trend reversal trades often mean that traders are taking trades at the start of a fresh trend and exiting at the end of a trend. These types of trades provide the most profits out of a given trend.
Trend reversal setups, if done wrong, could also be very frustrating. This is because trend reversal setups often mean that traders are trading against an existing trend. This means that if the trend is too strong, then there is a high chance that price would just barrel through your trade and continue the direction of the prior trend.
So, how do we take advantage of the opportunity presented by trend reversals while decreasing the likelihood that price would just barrel through our trade and our stop loss?
“It is better to enter a trend late than to enter the wrong trend.” This is something that a senior trader said that really stuck with me.
One of the best ways to trade trend reversals is by waiting for a confirmation of the actual trend reversal. Confirmations of a trend reversal is usually through a price action reversal pattern. This means that the swing highs and swing lows pattern have reversed to either become higher or lower.
Trend Cross Drive Forex Trading Strategy is a strategy that systematically helps traders predict and confirm a trend reversal using two technical indicators. One indicator anticipates the trend reversal while the other confirms the trend reversal based on price action.
Mega Trend Indicator
The Mega Trend indicator is a custom technical indicator based on the Hull Moving Average (HMA). It is a trend following indicator which helps traders identify trend direction based on a moving average line that changes color depending on the direction of the trend.
Moving averages are very useful when it comes to identifying trend direction. The two most common ways to identify a trend using a moving average line is by identifying the location of price action in relation to the moving average line and looking at the slope of the moving average line.
Price action that is constantly above the moving average line indicates a bullish trend, while price action that is constantly below the moving average line indicates a bearish trend. Price action that is constantly crossing a flat moving average line indicates a non-trending market.
Although moving averages are very useful in identifying a trend, it also has some disadvantages. Moving averages are either too lagging or too susceptible to choppy market signals.
Mega Trend indicator manages to decrease such susceptibility to choppy markets by smoothening out the moving average line, while at the same time making it more responsive to price movements.
The moving average line of the Mega Trend indicator is characteristically very smooth yet very responsive. It also changes color depending on the direction of the trend. Blue lines indicate a bullish trend, while red line indicate a bearish trend.
Indicator Arrows
Indicator Arrows is another custom technical indicator which helps traders identify trend direction. It provides trend reversal signals by plotting arrows based on a confluence of its underlying technical indications.
This indicator is basically a signal indicator which uses confluences coming from Moving Averages, Moving Average Convergence and Divergence (MACD), Oscillation of Moving Averages (OsMA), Stochastic Oscillators, Relative Strength Index (RSI), Commodity Channel Index, and Average Directional Movement Index (ADX). Because it is a confluence of so many indicators, it tends to provide very reliable trend reversal signals.
The Indicator Arrows signal naturally correspond with the swing highs and swing lows of price action. It usually plots arrows just a few candles after a swing high or a swing low, making it a very responsive yet reliable trend reversal signal.
Trading Strategy
This trading strategy is a simple trend reversal strategy based on the crossing over of price action and the Mega Trend line. However, instead of taking every crossover that occurs, it waits for confirmation of a trend reversal based on price action and the Indicator Arrows.
First, we would have to wait for the Mega Trend line to change color, which indicates a probable trend reversal. This would also usually coincide with price action crossing over the Mega Trend line.
Then, we wait for the Indicator Arrows to be plotted. This would usually coincide with the swing highs and swing lows of price action. If the Indicator Arrow plotted points the direction of the trend reversal as indicated by the Mega Trend crossover setup, then the trend reversal is confirmed and could be traded.
Indicators:
- Mega trend
- Indicatorarrows
Preferred Time Frames: 1-hour and 4-hour charts
Currency Pairs: FX majors, minors and crosses
Trading Sessions: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- Price action should cross above the Mega Trend line.
- The Mega Trend line should change to blue.
- The Indicator Arrows should plot an arrow pointing up after the Mega Trend line changed to blue.
- Enter a buy order upon confirmation of these conditions.
Stop Loss
- Set the stop loss on the support level below the entry candle.
Exit
- Close the trade as soon as the Indicator Arrows plot an arrow pointing down.
Sell Trade Setup
Entry
- Price action should cross below the Mega Trend line.
- The Mega Trend line should change to red.
- The Indicator Arrows should plot an arrow pointing down after the Mega Trend line changed to red.
- Enter a sell order upon confirmation of these conditions.
Stop Loss
- Set the stop loss on the resistance level above the entry candle.
Exit
- Close the trade as soon as the Indicator Arrows plot an arrow pointing up.
Conclusion
This trading strategy is a working trading concept. Many profitable retail traders trade on trend reversals based on the crossover of price action and a moving average line while waiting for a retest of the moving average line.
This strategy however simplifies the identification of a trend reversal and a confirmation. The changing of the color of the Mega Trend line indicates the probable trend reversal along with the crossing over of price action. The Indicator Arrows which usually coincides with the swing highs and lows of price action confirms the trend reversal based on the standards of price action swings.
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