If you have been trading for quite some time, you would know that the market does only three things – range, trend or reverse.
Among the three types of market conditions, reversal markets are probably one of the most difficult to catch. There is usually a higher level of difficulty and uncertainty when trying to trade against a weakening trend, hoping that price would reverse strongly and start a new trend.
Although trend reversals have a higher degree of difficulty, it is also one of the most lucrative type of trading strategies. This is because trend reversals that lead to a new trend have the most ground to cover and therefore allow traders to gain more pips. It allows traders to catch a fresh trend from the beginning and hopefully exit the trade right at the end. These types of trades usually produce the biggest yields in comparison to the risk placed on each trade.
The RSI Double Trend Crossover Forex Trading Strategy is one which traders may use when trading a trend reversal setup. This could be used as a standalone trend reversal strategy or could also be incorporated as a confirmation for trade setups on diagonal trendline breakouts.
Double Trend Profit
Moving averages are used by many traders to detect trend changes. Different traders use different approaches when using the moving average to identify trend direction.
The simplest approach is by identifying where price is in relation to the moving average. If price is above the moving average line, then the trend is bullish. If price is below the line, then the trend is bearish.
Another approach is by observing the slope of the moving average line. Upward sloping lines indicate a bullish trend, while downward sloping lines indicate a bearish trend.
Another popular way to identify the trend is by identifying how the moving average lines are stacked. Having the faster moving average line above a slower moving average indicates a bullish trend, while moving averages that are stacked inversely indicates a bearish trend. For this reason, many traders make use of the crossovers of two moving average lines as a trend reversal signal.
The Double Trend Profit indicator is a trend-following indicator based on moving averages.
This indicator plots two moving averages, one being faster than the other. These moving averages also change colors depending on the slope of the moving average line.
The faster moving average line is colored green when sloping up and red when sloping down. The slower moving average line on the other hand is colored blue when sloping up and white when sloping down. These serve as double confirmation of the trend direction by making use of how the moving averages are stacked and when the crossovers occurred, and by identifying the direction of the slope of the moving averages.
Flat Trend RSI
The Relative Strength Index (RSI) is one of the most popular oscillating technical indicators used by many traders.
The RSI is intended to track the movement of price and detect market trend based on the closing price of each candle for a specified period. It then plots a line that oscillates from 0 to 100.
The RSI is traditionally used to identify trend direction and overextended market trends which are prone to reverse. To identify trend direction, traders use the RSI by observing where the RSI line is in relation to its midline. RSI lines above 50 indicate a bullish trend while RSI lines below 50 indicate a bearish trend.
On the other hand, mean reversal traders would identify oversold and overbought market conditions by observing where the RSI line is. RSI lines below 30 indicate an oversold market while RSI lines above 70 indicate an overbought market.
However, although mean reversal traders use the RSI line in the manner indicated above, the same conditions might also mean momentum going the other direction. RSI lines crossing strongly above 70 indicate a bullish momentum while RSI lines crossing strongly below 30 could indicate a bearish momentum.
The Flat Trend RSI indicator is an RSI Filter which identifies momentum reversals based on the RSI line. It observes if the RSI line has crossed above 70 or below 30 and indicates the momentum direction based on it. This indicator then prints positive histogram bars to indicate bullish momentum and negative histogram bars to indicate bearish momentum.
Trading Strategy
This strategy provides trend reversal signals based on the Double Trend Profit indicator and the Flat Trend RSI indicator. Entry signals are generated whenever there is a confluence between the two indicators.
The Flat Trend RSI is used as a direction filter based on the histogram bars.
The Double Trend Profit indicator on the other hand provides entry signals based on the crossing over of the two moving average lines confirmed by the slope direction indicated by the color of the lines.
Indicators:
- doubletrendprofit
- SignalPeriod1: 15
- SignalPeriod2: 18
- Flat_Trend_RSI
- PeriodRSI: 6
Preferred Time Frame: 15-minute, 1-hour, 4-hour and daily charts
Currency Pairs: major and minor pairs
Trading Session: Tokyo, London and New York
Buy Trade Setup
Entry
- The Flat Trend RSI filter should be printing positive histogram bars indicating bullish momentum.
- On the Double Trend Profit indicator, the faster moving average line (green) should cross above the slower moving average line (blue) indicating a bullish trend reversal.
- These bullish trend reversal signals should be closely aligned.
- Enter a buy order on the confluence of the above conditions.
Stop Loss
- Set the stop loss on the support level below the entry candle.
Exit
- Close the trade as soon as the Flat Trend RSI filter starts printing negative histogram bars.
- Close the trade as soon as the Double Trend Profit indicator’s slower line changes to white.
Sell Trade Setup
Entry
- The Flat Trend RSI filter should be printing negative histogram bars indicating bearish momentum.
- On the Double Trend Profit indicator, the faster moving average line (red) should cross below the slower moving average line (white) indicating a bearish trend reversal.
- These bearish trend reversal signals should be closely aligned.
- Enter a sell order on the confluence of the above conditions.
Stop Loss
- Set the stop loss on the resistance level above the entry candle.
Exit
- Close the trade as soon as the Flat Trend RSI filter starts printing positive histogram bars.
- Close the trade as soon as the Double Trend Profit indicator’s slower line changes to blue.
Conclusion
This crossover strategy is an upgraded version of a standard crossover strategy. It makes use of moving average line slopes as well as an RSI momentum filter to confirm trend reversals.
As a crossover strategy, this strategy is best implemented on a market which is about to reverse its trend. It is also best to combine this strategy with a breakout from a support or resistance line as these are telltale signs of a trend reversal.
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