Trading strategies are usually classified into two categories, momentum trading strategies and mean reversal trading strategies.
Momentum trading strategies are those that are based on the trend. Momentum traders would usually try to find price action which have moved quite significantly in one direction in just a short period of time. This could also refer to trading based on the sudden shift of trend directions.
Mean Reversal strategies on the other hand, refer to trading overextended price points on the assumption that price would always revert to its average price. When you come to think of it, this also true. Whenever price seems to be at an all time high, people usually avoid buying that product or item and sellers tend to want to sell it quickly as possible, which bring price back down. However, whenever price is too low, buyers would start buying quickly to get the product at a discount, while sellers may start pulling it out of the store’s shelves, which brings price back up. The same is true with trading, only that price changes quick and everything happens on a price chart.
These two types of trading strategies are usually a contradiction. However, there are some peculiar cases when a mean reversal entry could also be a momentum or trend reversal. The DeMarker Arrows Forex Trading Strategy is an example of this type of strategy.
The DeM Indicator
DeMarker Indicator, also known as DeM, is an oscillating indicator based on highs and lows. The DeMarker indicator compares the minimum and maximum price average within a given period. It then plots the results as a line that oscillates from zero to one, with the midpoint being at five.
Being a bounded oscillating indicator, traders could objectively identify if price is considered overbought or oversold. In most cases, the oversold and overbought markers are set at 0.3 and 0.7. Whenever DeM is below 0.3, the market is usually considered oversold, while if it is above 0.7, then the market is considered overbought. This makes the DeMarker indicator useful in Mean Reversion types of strategies.
Commodity Channel Index
Commodity Channel Index or CCI is another type of oscillating technical indicator, developed by Donald Lambert in 1980.
The CCI is based on a Simple Moving Average and Typical Price, which is the average of the high, low and close. The CCI is computed in a way that 70% of price would fall within +/- 100. Prices above or below this range could also be considered as overbought or oversold. This also makes it useful as a mean reversal tool.
However, crossovers from negative to positive and vice versa could also be considered as a trend reversal based on the shifting of momentum. This also makes the CCI useful for trend reversal traders.
Buy Sell Arrow Scalper Indicator
The Buy Sell Arrow Scalper Indicator is a trend following custom indicator. It indicates the trend by drawing a line that follows price action and changes color whenever it detects a change in trend. It paints a blue line whenever it detects a bullish trend and a red line when it detects a bearish trend. It also draws bars attached to the line to indicate trend. The bars are attached below it when the trend is bullish and above it when the trend is bearish.
Trading Strategy
This trading strategy is a combination of both a trend following, and mean reversal type of strategies based on the indicators mentioned above.
The DeMarker indicator is used to determine market conditions that are prime for mean reversal. Whenever the DeM is over its range and is indicating that price could either be overbought or oversold, we should start to take notice of that particular pair. We then wait for it to show signs of reversal based on the crossing back of the line within its range, which is 0.3 to 0.7.
The mean reversion scenario of the DeM should also closely coincide with the trend reversal indication of the CCI and the Buy Sell Arrow Scalper. As for the CCI, the basis would be the crossing over of the CCI line from positive to negative or vice versa. On the other hand, the Buy Sell Arrow Indicator’s reversal will be based on the changing of colors and the appearance of entry signal arrows.
Indicators:
- buysellarrowscalper
- Amplitude: 2
- DeMarker
- DeMarker Period: 21
- Commodity Channel Index
- Period: 28
Timeframe: 1-hour, 4-hour and daily charts
Currency Pair: major and minor pairs
Trading Session: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- The DeMarker line should cross above 0.3 coming from below indicating a possible bullish mean reversal
- The CCI line should cross above zero indicating a possible bullish trend reversal
- The Buy Sell Arrow Indicator should change to blue and print an arrow pointing up indicating a possible bullish trend reversal
- Enter a buy order on the confluence of the above conditions
Stop Loss
- Set the stop loss below the Buy Sell Arrow Indicator
Exit
- Close the trade if the Buy Sell Arrow indicator changes to red and prints an arrow pointing down
Sell Trade Setup
Entry
- The DeMarker line should cross below 0.7 coming from above indicating a possible bearish mean reversal
- The CCI line should cross below zero indicating a possible bearish trend reversal
- The Buy Sell Arrow Indicator should change to red and print an arrow pointing down indicating a possible bearish trend reversal
- Enter a sell order on the confluence of the above conditions
Stop Loss
- Set the stop loss above the Buy Sell Arrow Indicator
Exit
- Close the trade if the Buy Sell Arrow indicator changes to blue and prints an arrow pointing up
Conclusion
This trading strategy is a high probability trading strategy because it combines both mean reversal and trend reversal conditions. Having both these market conditions coincide only brings the probability of trend change higher.
Although mean reversal and trend reversal strategies are not of the same type of strategies, these two strategies could still be combined provided that we use the right combination of indicators. The three indicators, although having different functions in this strategy, are still complimentary indicators that work well together.
Trade management skills are still very important with this type of strategy in order to maximize profits. This includes moving the stop loss to breakeven at the right time and trailing the stop loss after each trending push towards the trades direction.
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