Trend Magic RSI Forex Trading Strategy

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Trend Magic RSI Forex Trading Strategy

Profitable strategies have one thing in common – confluence. Confluence simply means the “coming together” of several factors. In trading, you would often find scenarios or market conditions wherein several deciding factors, such as price action, candlestick patterns, indicators, etc., come together indicating the same trade direction. These are the kind of market conditions that usually produce high probability trade setups. Almost all, if not all, profitable strategies make use of confluences.

The Trend Magic RSI Forex Trading Strategy is a strategy which provides trade entries based on a confluence of two complementary momentum indicators. This gives traders an opportunity to trade the market with a high probability trade setup, giving traders a higher chance of success.

Trend Magic Indicator

The Trend Magic indicator is a momentum indicator which shows traders the direction of the current trend.

It draws a line on the price chart which is colored depending on the direction of the trend. Blue lines drawn below price action indicates a bullish trend, while red lines drawn above price action indicates a bearish trend.

Trend reversals cause the Trend Magic indicator’s line to change color. These color changes could be used as an entry signal for a trend following strategy or trend reversal strategy.

RSI Filter

The Relative Strength Index (RSI) is a widely used technical indicator. It is an oscillating indicator which mimics the movement of price quite closely.

The RSI oscillates from 0 to 100 and has a midpoint at 50.

There are many ways to interpret the RSI. Traditionally, values above 70 are considered as overbought while values below 30 are considered as oversold. Mean Reversal traders would use these conditions to trade trend reversals based on the hypothesis that since price is overextended, price would likely reverse back to its mean.

However, there is another way of interpreting the RSI based on an opposing hypothesis. Momentum traders would interpret breaks out of the 30 to 70 range as an indication of a momentum breakout.

The RSI Filter is based on the momentum hypothesis of the RSI indicator. The RSI filter would print positive bars on bullish momentum and negative bars on bearish momentum. This helps traders anticipate momentum breakouts and reversals based on the signals provided by the indicator.

Trading Strategy

Confluences based on technical indicators are one of the most popular ways to trade the forex market. It causes traders to trade based on rules instead of gambling based on their intuition. This lessens the influence of emotions such as fear and greed to affect their trading decisions, thereby allowing them to have consistency on their trades.

The Trend Magic RSI Forex Trading Strategy is a trend reversal strategy which trades on the confluence of trend reversal signals based on the Trend Magic indicator and the RSI Filter.

The Trend Magic indicator is trend reversal indicator which shows exact reversal points based on the changing of its color. The RSI Filter on the other hand also indicates trend reversals, however these trend reversals are based on shifts in momentum.

Both indicators provide trend reversal signals independently as a standalone indicator, with a relatively high degree of accuracy. However, whenever the two indicators signal a trend reversal at almost the same time, the likelihood of the trend reversing becomes significantly higher. This is because the trend reversal signals have momentum behind it.

These indicators would usually provide confluences only when there is a strong momentum candle going against the current trend. This would also usually coincide with breakouts from supports or resistances.

Indicators:

  • Trend Magic (default settings)
  • Flat Trend RSI (default settings)

Preferred Timeframe: 15-minute, 1-hour, 4-hour and daily charts

Currency Pairs: major and minor pairs

Trading Session: Tokyo, London and New York sessions; trade on the session of the currency pair being traded if trading on the lower timeframes

Buy Trade Setup

Entry

  • Price should cross above the Trend Magic indicator line
  • A bullish momentum candle should be observable
  • The Trend Magic indicator should change to color blue indicating bullish trend reversal
  • The RSI Filter should change from printing negative bars to positive bars indicating a bullish trend reversal based on momentum
  • 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 Trend Magic indicator line changes to red
  • Close the trade as soon as the RSI Filter bars becomes negative

Trend Magic RSI Forex Trading Strategy

Trend Magic RSI Forex Trading Strategy2

Sell Trade Setup

Entry

  • Price should cross below the Trend Magic indicator line
  • A bearish momentum candle should be observable
  • The Trend Magic indicator should change to color red indicating bearish trend reversal
  • The RSI Filter should change from printing positive bars to negative bars indicating a brearish trend reversal based on momentum
  • 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 Trend Magic indicator line changes to blue
  • Close the trade as soon as the RSI Filter bars becomes positive

Trend Magic RSI Forex Trading Strategy3

Trend Magic RSI Forex Trading Strategy4

Conclusion

This strategy is a great trend reversal strategy. It combines the confluence of two trend indicators while taking in account the momentum which caused the trend reversal.

This strategy requires that the trader understand price action. This is because the entries produced by this strategy work best when a momentum candle is identified. It is even better if trend reversal patterns are also observed prior to the entry.

Traders should also learn to properly manage trades by moving stop losses to breakeven when possible and trailing the stop loss at an ideal distance. This increases the trader’s win ratio and it also protects profits from being given back to the market.

Trading this strategy with intelligent technical analysis should produce good results for traders.

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