Reversal trading Strategy

Author: Consultant Finmaxfx

What is a reversal trading?

Profitable reversal trading will help you to identify correct entry points on pullbacks of a trend action. The rates can not grow every time or decline everytime. Charts are always like waves and corrections occur periodically from the main trend. Such retracements are called pullbacks and they have to be considered as awesome entry points during a trend action.

Trading Reversals

If you take any chart with a 15-minutes timeframe as an example, you will see that prices rise all the time during some continuous trend. All of the oscillators, most probably, are in the overbought zone and it seems like a reversal is going to happen very soon. But it would be a huge mistake trying to catch a reversal candlestick with such a strong trend. It is much more productive to bet according to the trend. Most of the profitable strategies are based on exactly the same approach. All of the bullish candlesticks have an upside shadow which means that the price was not going up all the time, there were bounces happening. We could use those bounces to enter the market and get a good profit as the result. It is obvious, of course, when you look back on the history. But how can we identify an entry point in real-time conditions? It is rather easy to do and we will tell you how.

You will catch every move as the market transit from an accumulation stage to the advancing stage.

Trading Rules

Let us give you an important advice. If you see a strongly marked trend on any chart, then it would be very easy to find an entry point using a shorter timeframe for the same chart. It is very important to understand that every bullish or bearish candlestick consists of many full-size candles of a shorter timeframe, which can be analysed as well.

We change the timeframe from 15-minutes to 5-minutes and we add the following indicators: Bollinger Bands, MACD and MA with period 10.

And we get such a picture:

Reversal trading Strategy

Now as we remember that the longer timeframe has the strong uptrend, we can start trading on retracements. The positions have to be opened in the direction of the longer timeframe trend, in our case, upside only. So, let’s have a look at what signals do we get from the strategy.

Deal opening rules for the uptrend of the longer timeframe:

  • The chart has to be between the upper Bollinger Band line and MA with period 10;
  • MACD histogram has to raise;
  • Bets should be made on the candles’ bounce to MA10 with expiration for 1-2 candlesticks ahead.

Deal opening rules for the downtrend of the longer timeframe:

  • The chart has to be between the lower Bollinger Band line and MA with period 10;
  • MACD histogram has to decline;
  • Bets should be made on the candles’ bounce to MA10 with expiration for 1-2 candlesticks ahead.

Stop-loss and take profit orders has to bes set depending on your money management rules and also depending on the asset you trade as different currency pairs might have different volatility. But as we are talking here about the 5 minutes timeframe, stop-loss and take profits have to rather tight and not exceeding the range of 10-30 pips.

We can catch such awesome deals in this simple way on price bounces from the main trend. We called this forex trading strategy as profitable not just like that but because it is suitable for all of the timeframes. But if you are going to use timeframes 15-minutes and 5-minutes as we showed you the example above, you will be getting much more forex trading signals than say timeframes of 1-hour and 4-hours.

If you like this strategy, you might also be interested in this Ichimoku Trading Strategies

Conclusion

The Reversal Trading will work until the trend on the longer timeframe will be kept by the price action and the chart will be still between one of the Bollinger Bands lines and MA10. It is better to stop trading when the chart would break through MA10, just to avoid potential losses trading against the trend. Any other indicators could be also used as additional filters.

For example, Force Index, Parabolic SAR and reversal candlestick patterns could be used for that purpose. The main thing is to avoid sorting out unsuccessful deals using the Martingale method as it is not going to help you on the trend reversal.

See also:
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