Trend Reversals are one of the most profitable types of trading strategies. Trades are taken usually at the start of a fresh trend. Because of this, trades tend to last quite longer than usual. Price moves in one direction quite longer squeezing out more profits for discerning traders.
However, trend reversal setups are not that easy to trade. Often, traders are working against a current trend, hoping to enter the trade as soon as the market starts to reverse.
Often, trend reversal strategies would bring in profits mostly because of the high yielding profitable trades. If traders could find a way to consistently take winning trend reversal trades, they would wind up having high probability and high yielding trade setups. This means more money in the pocket. But how do we increase the likelihood of entering a trend reversal trade setup and winding up profiting often?
Overbought and oversold market conditions are prime conditions for a trend reversal. One analogy we could use is that of an elastic slack line, one that could stretch a bit but would rebound to the other end when stretched too far. Imagine that slack line being pulled to one side too much. As soon as the force of the pull is let gone, the slack line would want to come back to the middle. However, because of the force stored during the pull, the slack line would rebound to the other side and oscillate back and forth until it settles in the middle.
The same thing is happening with price during an overbought or oversold condition. Price would want to go back to the middle. However, because of the strong selling (overbought) or buying (oversold) pressure caused by the overextended condition, price would often rebound strongly causing a new trend.
RSI HiLo Trend Reversal Forex Trading Strategy is a strategy that trades on such conditions. It uses a modified RSI to determine the overbought or oversold condition and uses a Gann HiLo indicator to determine the trend reversal.
Gann HiLo Activator Bars
Gann HiLo Activator Bars (Gann HiLo) is a trend following momentum indicator that helps traders identify the direction of the short-term trend.
This indicator indicates the short-term trend by overlaying bars on the candlesticks. These bars change colors depending on the direction of the short-term trend. In this setup, blue bars indicate a bullish trend while orange bars indicate a bearish trend.
This indicator could also be a good trend reversal entry signal. Entry signals are generated whenever the bars change colors.
Free RSI
Free RSI is a custom technical indicator which is a modified version of the Relative Strength Index (RSI).
This indicator is an oscillating indicator much like the classic RSI. It oscillates within a range of 0 to 100. An RSI line that crosses above 70 is indicative of an overbought market condition, while an RSI line falling below 30 is indicative of an oversold market condition.
The difference though is that the Free RSI indicator moves more smoothly compared to the classic RSI. It also has a signal line which the RSI line would crisscross over. The RSI line crossing above the Signal Line would indicate a bullish trend, while a cross below the Signal Line would indicate a bearish trend.
Trading Strategy
This trading strategy trades on trend reversal signals based on the Free RSI indicator and the Gann HiLo Activator Bars.
The Free RSI indicator would be used to determine whether the market is overbought or oversold, as trades are taken only when the reversal was initiated coming from such market conditions. The RSI line (magenta) should then cross the Signal Line (yellow) indicating a reversal.
The Gann HiLo Activator Bars would then confirm the trend reversal by the changing of its colors.
Trades are taken as soon as the two indicators are in confluence with one another coming from an overextended market condition.
Indicators:
- Gann HiLo activator bars
- Lb: 18
- freeRSI (default settings)
Preferred Time Frames: 1-hour and 4-hour charts
Currency Pairs: major and minor pairs
Trading Sessions: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- On the Free RSI indicator, the RSI line should fall below 30 indicating an oversold market condition.
- The RSI line (magenta) should cross above the Signal Line (yellow).
- The Gann HiLo Activato Bars should change to blue.
- These bullish signals should be closely aligned.
- Enter a buy order on the confirmation of the conditions above.
Stop Loss
- Set the stop loss on the fractal below the entry candle.
Exit
- Close the trade as soon as the Gann HiLo Activator Bars change to orange.
Sell Trade Setup
Entry
- On the Free RSI indicator, the RSI line should rise above 70 indicating an overbought market condition.
- The RSI line (magenta) should cross below the Signal Line (yellow).
- The Gann HiLo Activato Bars should change to orange.
- These bearish signals should be closely aligned.
- Enter a sell order on the confirmation of the conditions above.
Stop Loss
- Set the stop loss on the fractal above the entry candle.
Exit
- Close the trade as soon as the Gann HiLo Activator Bars change to blue.
Conclusion
This trading strategy is a combination of both a trend reversal and a mean reversal strategy. Trades are taken as trend reversal trades, however only trade setups that are coming from an overbought or oversold condition are taken.
Such trade setups tend to have a high probability of generating a win. However, traders who are using this strategy should also have good trade management skills because some mean reversal setups do not result in a new trend. In these scenarios, trades could reverse. What could have been a profitable trade could become a loss if not managed correctly.
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