We consider that the trend is up, when the MA with period 20 is above MA with period 50, and they both are above MA with period 100. MAs should rise in the same direction and have distance from each other. It’s standart rule of using MAs to determine the trend. We also consider that we have down trend, when MAs are arranged in such order MA100, MA50 and MA20. When the MAs are intertwined and have different direction, we have range market conditions. In this case, we must not use reversal signals from MAs. There are also cases, when it is possible to open trades based on trend signals, having only 2 MAs which move in the same direction. These cases can be in the beggining of new trend and deep corrections.
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Here is the instructions how to use trend signals given by the trading strategy, follow each item, it is important:
1. First of all we identify trading conditions - it's trend or range. If it's range, look at another market. If it's trend market conditions, we go to the next step
2. We have to wait, when price comes to one of the MAs. It could be breakout or reversal. We don’t know. But if price bounced from MA, go to the next step
3. Price reversal from MA must be confirmed by MACD indicator - this is the main indicator and RSI is used only for double confirmation. If the indicators confirm reversal, then we must be ready to place a pending order above or below the signal candle (this is reversal candle, where we get confirmation from MACD and RSI), if we meet one more condition
4. DMI indicator should not confirm the power of correction movement. ADX must start falling, if before it confirmed correction, or ADX must rise and confirm movement in the same direction as the main trend. If this condition is met, we will place a pending order for the entrance.
5. Stop loss must be placed below the nearest swing low for up trend and swing high for down trend.
6. Profit target can be the nearest support or resistence levels, where the price can be stopped, or Bollinger Bands on working timeframe or higher, or simply based on the ratio Target = SL (stop loss size in pips) x 2 or 3.
7. When we have open trade, the follow question is, how to protect possible profit? And this could be done by different variants. One of them, when price has passed the size of stop loss, move your stop order to the entry level and then follow the price.
If we have only one setup for opening trades, exit from market can be done in different ways that greatly influences on profit. I will write about it in detailes in the following parts. As for trend signals - now you know how to open trades. I often place trading ideas based on trend signals, and for better understanding the principles of trading, please, read the published ideas and subscribe in order to get new. If you have questions about trend signals, please write in comments. I will be glad to answer all your questions.
1) I presume this should work for any market i.e. individual shares, ETFs, currency pairs etc. Or do you find it works for some better than others?
2) By the MACD confirmation, I presume you mean a relevant change in the histogram bars?
3) The DMI indicator isn't something I have used before. Could you please explain with reference to the example you supplied about the ADX line. Starting from the left of this chart, in your first two examples the ADX was flat or rising slightly at the relevant signal point i.e contrary to the proposed shorting, but in the third (in late Feb) it was obviously falling in line with the signal.
4) I couldn't quite see from your chart which MAs you use? Are they EMAs or SMAs? Do you find one works better than the other or is a question of seeing what has tended to work best in that market?
5) Do you have a rough idea of the % success rate of this strategy?
1) Yes, it's workable for any markets and different time frames like 15M, 1H, 4H and daily. I should say that this strategy has several types of signals for different market conditions. Here you read the trend following signals. There are also signals for range markets, for volatility breakouts, for trading against the main trend and when price breaks Moving Average with period 100. Different markets can give different profit and it depends on what signals you use. For example if we talk about trend following signals commodities can give more profit then currencies. For range signals it's better to use currencies. Any way you can use all markets in your trading with all signals, you will be in profit.
2) Yes, MACD confirmation is when histogram changes the direction. MACD is the main indicator for confirmation and it gives a signal for opening trades. As for MACD lines, they are used on higher time frames for searching the main price movement.
3) ADX and DMI are the same idicator but with different names. If you use MT4 or MT5 you find ADX, if you use cTrader you find only DMI or DMS. DMI consists of 3 lines where 2 DI lines shows the direction for trades and ADX shows power of price movement. I use this indicator for getting reply on 2 questions - what kind of market conditions do we have now? and does ADX confirm the power of price movement? That's all. Based on this sample, in the beggining of the chart we have range market. ADX is below 20 and it allows to open trades based on trend signals if we have confirmation from other indicators. MAs shows that probably we have the beggining of new trend. After that ADX rises above 20 and confirms trend market conditions. For example if ADX is above 20 and rising, +DI higher then -DI - in such way we can't open short trades even other indicators confirm down movement. We must not open any trades against strong price movement. It's rather simple.
4) I use SMA. You can use SMA or EMA - it does not matter. The strategy must be reliable for both types of MA. You just have different levels for entry. For long term trading it does not matter. But I think it's better to use EMA for minutes charts. They are faster.
5) I have been testing the strategy on different timeframes, markets. We can have the same entry levels, the same stop levels, but as for exit - I can offer you 5 different variants. They all give different % of profit trades. If you use R/R ratio like 1:1, you can have 60-70% profit trades if you follow the main price movements from higher time frames. If you trade with R/R ratio like 1:2, you can have around 50% of profitable trades and it will be great. Any way, the strategy is profitable for long term.
Thanks for your question. If you need more information, please, send me PM.
Have a nice day!