Trend reversals are probably one of the highest yielding types of trading strategies. Trade setups that turn out to be new trends would often result in very profitable trades. That is if the trade setup turns out to be a winner.
Trend reversal strategies are often high yielding trade setups, however catching a very profitable trade setup is much harder than it seems. Trades are often taken against the grain of an established trend. As a result, many traders would have high yielding trades at the expense of taking low probability trades. This is because many traders would blindly follow a trend reversal signal without analyzing visually if the market has confirmed a probable trend reversal scenario.
Price action traders often have a better chance at trading trend reversals. This is because price action traders often look for breakouts of supports and resistances to establish whether the market is about to reverse or not.
Trend Envelope Signals Forex Trading Strategy is a trend reversal strategy that combines price action, breakouts, momentum, crossover reversal signals, and a confluence of trend following indicators. The results are trend reversal setups that have a relatively higher probability of a win compared to other trend reversal strategies.
Trend Envelopes
Trend Envelopes is a trend following technical indicator which helps traders identify trend direction as well as provide trend reversal signals.
This indicator is based on a classic moving average line. One of the simplest ways to use a moving average is to take trade signals whenever price crosses a moving average line. This is a good way to trade the market based on trend reversals and short-term momentum reversals. However, there is also a drawback to this moving average entry signal. During trending markets moving averages act as a dynamic support or resistance. In this scenario, price would tend to bounce off moving averages. This would cause traders who traded on the crossover of price and a moving average to incur losses.
The Trend Envelopes indicator addresses this by shifting an imaginary moving average line above and below the regular moving average line by a certain percentage. Trend reversal signals are only generated whenever price breaches these shifted lines. This allows a layer of protection for trend reversal traders trading on price and moving average crossovers since they are prevented from entering the market too early.
This indicator draws the moving average lines above and below price action. The lines shift depending on which direction it detects a trend. A light blue line placed below price indicates a bullish trend, while an orange line placed above price indicates a bearish trend.
EMA 5 10 34 Crossover
EMA 5 10 34 Crossover is a trend following technical indicator based on a series of Exponential Moving Averages (EMA).
This indicator provides trend reversal signals based on a 5, 10 and 34-period EMA line. Signals are generated whenever the three lines are stacked in order indicating a trend.
Having the 5 EMA above, 10 EMA on the middle and the 34 EMA below indicates a bullish trend. A bearish trend is indicated if the EMA lines are stacked inversely.
However, this indicator does not display the three lines. Instead it just places an arrow where it detects a trend reversal. Blue arrows pointing up indicate a bullish trend while red arrows pointing down indicate a bearish trend.
Trading Strategy
This trading strategy trades on breakouts from support and resistance trendlines and a confluence of the Trend Envelopes and EMA 5 10 34 Crossover indicators.
To trade this strategy, a support or resistance trendline should be clearly visible on the chart. Trades could be taken if price breaks out of these trendlines.
The Trend Envelope should also shift indicating a trend reversal based on the crossover of price and a moving average line.
On top of that, the EMA 5 10 34 Crossover should also provide a trade signal which is in confluence with a momentum candle.
A combination of all three conditions provide a strong case for a trend reversal since each of these individual conditions are trend reversal signals.
Indicators:
- TrendEnvelopes_v1 (default setting)
- EMA 5 10 34 CrossoverI (default setting)
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
- A resistance trendline should be observed on the chart.
- The Trend Envelope line should be shifted below price.
- Price should break above the resistance line.
- The EMA 5 10 34 Crossover indicator should print an arrow pointing up.
- The entry signal should correspond with a momentum candle.
- Enter a buy order on the confirmation of the conditions above.
Stop Loss
- Set the stop loss below the Trend Envelope line.
Exit
- Close the trade as soon as the Trend Envelope line is shifted above price.
Sell Trade Setup
Entry
- A support trendline should be observed on the chart.
- The Trend Envelope line should be shifted above price.
- Price should break below the support line.
- The EMA 5 10 34 Crossover indicator should print an arrow pointing down.
- The entry signal should correspond with a momentum candle.
- Enter a sell order on the confirmation of the conditions above.
Stop Loss
- Set the stop loss above the Trend Envelope line.
Exit
- Close the trade as soon as the Trend Envelope line is shifted below price.
Conclusion
Trend reversal strategies based on crossovers are working strategies if used on the right market condition and with the right setup.
Trading on trend reversal setups based on breakouts of supports and resistances is also a working strategy used by price action traders.
Trading on trend reversals based on a crossover of price and a moving average could also work in the right market condition.
Combining all three setups in one strategy provide a strong confluence which drastically increases the probability of catching winning trades and filtering out low probability trade setups.
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