Supertrend RSI Reversal Confluence Forex Trading Strategy for MT5

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Supertrend RSI Reversal Confluence Forex Trading Strategy for MT5 - Buy Trade

Trend reversals can be excellent trading opportunities as it allows traders to gain huge profits whenever they identify and respond to market reversals in a timely manner. However, new traders often find that trend reversal setups can be very difficult to anticipate especially in a naked chart. New traders often need a more objective indication of a possible reversal to confirm what they see in price action. This is why this strategy uses a couple of momentum indicators to help traders objectively identify and confirm potential trend reversals.

Supertrend Indicator

The Supertrend Indicator is a momentum indicator which identifies trend direction based on the concept of using an Average True Range (ATR) indicator as a basis for identifying trend direction.

One of the ways traders would identify trend direction is with the use of the ATR. Traders would use a multiple of the ATR as a gauge for identifying trend reversals. For example, traders would multiply the ATR by 2. In an uptrend, they would then subtract the resulting value of the multiple of the ATR from the value of the highest recent swing high. The difference would be the threshold for identifying a bearish trend reversal. The trend is considered to have reversed to the downside if price would drop below the above mentioned threshold.

Inversely, traders would add the product of the ATR and the nominated multiple to the most recent identified lowest swing low. This value then becomes the threshold for identifying bullish trend reversals. A bullish trend reversal is identified whenever price action would breach and close above the threshold coming from a downtrend market.

Given the trend reversal conditions stated above, trend reversals and trend direction may also be objectively identified using the same concept by automating the process of multiplying the ATR with a multiple, then adding or subtracting the value to the swing high or swing low.

The Supertrend Indicator simply plots the threshold values above or below price action depending on the trend direction. It plots the line below price action to indicate a bullish trend, and above price action to indicate a bearish trend. The line crosses over price action whenever price action would breach the said threshold indicating a trend reversal. The indicator also shades the area between price action and the threshold line making the identification of the trend direction much easier.

Supertrend Indicator MT5

Relative Strength Index as a Trend Indicator

The Relative Strength Index (RSI) is a momentum indicator which measures the magnitude of recent price changes. The indicator uses an algorithm which calculates for momentum based on recent price changes. The resulting value is then drawn as a line which oscillates within the range of 0 to 100. Its range also has markers at levels 30 and 70. The area below 30 indicates the oversold area, while the area above 70 indicates the overbought area.

Although the RSI indicator is typically used as an oversold and overbought indicator, it can also be used as a trend direction indicator. To do this, we may add levels 45, 50, and 55 as markers. The level 50 could be used as a general trend bias indication. Levels above it indicates a bullish trend, while levels below indicate a bearish trend. The RSI line should generally be above 50 in an uptrend and below 50 in a downtrend. The levels 45 and 55 can be used as a support and resistance marker for the RSI. The RSI line should not drop below 45 during an uptrend and should not breach above it during a downtrend. Crossovers above 55 may confirm a bullish trend reversal, while crossovers below 45 may confirm a bearish trend reversal.

Relative Strength Index as a Trend Indicator

Trading Strategy Concept

Supertrend RSI Reversal Confluence Forex Trading Strategy is a simple trend reversal trading strategy which uses the confluence of the Supertrend reversal signal and the RSI as a basis for identifying potential trend reversals.

On the Supertrend, the trend reversal would be the crossing over of the Supertrend line and price action, which can also be easily identified by the changing of the color of the filling between price action and the Supertrend line.

The RSI on the other hand is used as a confirmation of the trend reversal signal. This would be based on the RSI line breaching above 55 or dropping below 45.

These indicator signals should also be used in confluence with price action indications. This can be identified by a break in a swing high or swing low support or resistance level.

Buy Trade Setup

Entry

  • Price action should cross and close above the Supertrend line while the area between the price action and the Supertrend line should change to pale green.
  • The RSI line should cross above 55.
  • Price action should break above an identified swing high resistance area.
  • Open a buy order on the confluence of these conditions.

Stop Loss

  • Set the stop loss below the Supertrend line.

Exit

  • Close the trade as soon as price action crosses below the Supertrend line or as soon as the RSI line drops below 45.

Supertrend RSI Reversal Confluence Forex Trading Strategy for MT5 - Buy Trade

Sell Trade Setup

Entry

  • Price action should cross and close below the Supertrend line while the area between the price action and the Supertrend line should change to bisque.
  • The RSI line should cross below 45.
  • Price action should break below an identified swing low support area.
  • Open a sell order on the confluence of these conditions.

Stop Loss

  • Set the stop loss above the Supertrend line.

Exit

  • Close the trade as soon as price action crosses above the Supertrend line or as soon as the RSI line breaches above 55.

Supertrend RSI Reversal Confluence Forex Trading Strategy for MT5 - Sell Trade

Conclusion

This trading strategy is a simplified method for identifying trend reversals, allowing traders to easily identify trading opportunities which may arise whenever the market starts to reverse. The use of the Supertrend indicator and the RSI allows traders to objectively confirm the trend reversals. However, as with all indicators, these signals do have lag as its signals only follow price. As such, this trading strategy is best used in confluence with price action trend reversal signals as price action is the most direct technical indication of potential trend reversals.

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