It is always better to enter a market move that has been confirmed rather than jump the gun only to find out that the trade setup was not valid. Traders would often want to be the first one to a market move. We often want to be early on a trend or a reversal. However, being too early might also affect a trader’s performance.
Traders often make decisions based on catalysts. It could be a strong fundamental news data, a break of a major support or resistance line, a bounce off a supply or demand area or a clear trend reversal. Catalysts have one thing in common. It is that many traders see it and would take action based on it.
Market Catalyst Forex Trading Strategy is a strategy that produces signals which occur in areas where there is a possible trend reversal caused by a strong shift in momentum. Momentum candles are one of the main catalysts that traders look for. It is also commonly traded on breakouts of a previous swing high or swing low, or a breakout of a support or resistance line. Because different traders who trade based on different setups look for momentum shifts, trend reversals that incorporate momentum tend to work well. This strategy also makes use of confluences of two reliable indicators to confirm the momentum shift.
BBands Stop v1
BBands Stop v1 indicator is a trend following indicator based on the Bollinger Bands.
This indicator identifies trend direction based on momentum signals that occur with a standard Bollinger Band. These are breakouts from the Bollinger Band that close outside of the bands.
The indicator plots a line on the price chart to indicate trend direction. It plots the line below price whenever it detects a bullish trend. On the other hand, it plots the line above price to indicate a bearish trend.
Trend reversal signals are generated whenever the lines shift. Traders could take this as an entry signal.
The indicator could also be used as a trend direction filter. Traders could avoid taking trades that are going against the trend and take trades that are going with the flow of the trend.
Relative Vigor Index
Relative Vigor Index (RVI) is a technical indicator that identifies the strength of a trend. It does this by comparing the closing price of the current bar to historical prices.
The RVI is an oscillating indicator that plots two lines on a separate window. These lines move rather smoothly because of the smoothening effect incorporated in its calculation.
Positive lines indicate a bullish trend direction, while negative lines indicate a bearish trend direction. Lines crossing over the midline could be used as a trend reversal signal.
Trading Strategy
This trading strategy is a simple trend reversal strategy which incorporates momentum in its setup. It uses the BBands Stop v1 and the RVI indicator to identify these trend reversal points.
The BBands Stop v1 indicator is mainly used to identify trend reversals based on momentum shifts. Trend reversal signals are based on the shifting of the dotted lines. The BBands Stop v1 indicator is a reliable momentum reversal indicator because it usually indicates a reversal only when price breaches its line, which occurs usually when there is a strong momentum reversal. However, it is still important to identify momentum candles to confirm the setup.
The Relative Vigor Index indicator simply confirms the trend reversal. This is based on the crossing of the two lines over the midpoint, which is zero.
Indicators:
- BBands_Stop_v1
- Length: 28
- Relative Vigor Index
- Period: 28
Preferred Time Frames: 30-minute, 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 should close above a prior BBands Stop v1 line.
- The BBands Stop v1 line should shift below price.
- A bullish momentum candle should be observable.
- The RVI lines should cross above zero.
Stop Loss
- Set the stop loss on the fractal below the entry candle.
Exit
- Trail the stop loss below the BBands Stop v1 line until stopped out in profit.
Sell Trade Setup
Entry
- Price should close below a prior BBands Stop v1 line.
- The BBands Stop v1 line should shift above price.
- A bearish momentum candle should be observable.
- The RVI lines should cross below zero.
Stop Loss
- Set the stop loss on the fractal above the entry candle.
Exit
- Trail the stop loss above the BBands Stop v1 line until stopped out in profit.
Conclusion
This trading strategy works well when used on breakouts from a congestion point at the tail end of a previous trend. It works well because often the signals produced are in conjunction with a breakout from a recent market contraction phase.
Traders who would want to use this strategy should first learn to identify probable trend reversals based on the contraction of candles. These contractions could either be a mere retracement or a precursor to a trend reversal. The difference lies in where the market starts to breakout. If price would breakout against the direction of the trend, the setup in this strategy would work well and start a new trend.
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