Creating Reversal and Trend Continuation Strategies with Indicators

In this tutorial, we’ll explore how to create both reversal and trend continuation strategies using a variety of indicators. We’ll use the given reference parameters to structure effective strategies for different timeframes and markets, primarily focusing on M1, M5, and M15 indices. Each strategy will be named and IDed for journaling and performance review.

Table of Contents

1. Introduction
2. Understanding Indicators
3. Strategy 1: Reversal Strategy
   • Introduction
   • Setup
   • Entry and Exit Rules
   • Example Trade
4. Strategy 2: Trend Continuation Strategy
   • Introduction
   • Setup
   • Entry and Exit Rules
   • Example Trade
5. Conclusion

Introduction

Creating effective trading strategies involves understanding how to use various indicators to identify potential trade opportunities. This tutorial will guide you through the process of creating reversal and trend continuation strategies using the best-performing indicators tested across multiple timeframes and markets.

Understanding Indicators

Before diving into the strategies, let’s briefly understand the indicators and their parameters:

1. TMA (Triangular Moving Average): Smoothing averages over different periods to identify trends and reversals.
   • Parameters: (55/3, 200/2.2, 200/3, 200/4)
2. MFI (Money Flow Index): Measures buying and selling pressure.
   • Parameters: (7/10/15/20/80/85/90)
3. Momentum: Measures the speed of price changes.
   • Parameters: (10/Smooth3, 100.25/99.75)
4. LWMA (Linear Weighted Moving Average): Gives more weight to recent data.
   • Parameters: (10, 30)
5. HMA (Hull Moving Average): Reduces lag and improves smoothing.
   • Parameters: (20, 34)
6. TMA (Triangular Moving Average): Another version with different periods.
   • Parameters: (7-21)
7. Cumulative Delta & DS Contrast: Measures volume changes to detect trends.
   • Parameters: (7, 0)
8. Volume Profile POC (Point of Control): Identifies significant price levels based on volume.
9. Volume: Measures the number of shares traded.
10. Heiken Ashi: A candlestick charting technique to smooth price data.
11. Range Bars: Represents price changes over a set range instead of time intervals.
    • Parameters: (Range 5/10/20, TF M1/M5/M10)

Strategy 1: Reversal Strategy

Introduction

A reversal strategy aims to identify points where the market changes direction. By combining multiple indicators, we can increase the accuracy of our signals.

Setup

1. Indicators Used: TMA, MFI, Momentum, Volume Profile POC
2. Chart: M5 timeframe for indices

Entry and Exit Rules

1. Entry Rules:
   • TMA: Look for the TMA (55/3) crossing above the TMA (200/2.2).
   • MFI: MFI should be in the overbought/oversold zone (above 80 or below 20).
   • Momentum: Momentum indicator should show a change in direction (10/Smooth3).
   • Volume Profile POC: Price should be near a significant POC level indicating strong support/resistance.
2. Exit Rules:
   • TMA: Look for a cross back or a flat TMA.
   • MFI: MFI exits the overbought/oversold zone.
   • Momentum: Momentum shows a reversal.
   • Volume Profile POC: Price moves away significantly from POC.

Example Trade

• Chart: M5 Index
• Indicators: TMA (55/3, 200/2.2), MFI (7/10/15/20/80/85/90), Momentum (10/Smooth3), Volume Profile POC

Strategy 2: Trend Continuation Strategy

Introduction

A trend continuation strategy aims to join a prevailing trend after a minor pullback. This helps in maximizing profits by riding the trend longer.

Setup

1. Indicators Used: LWMA, HMA, Heiken Ashi, Volume
2. Chart: M15 timeframe for indices

Entry and Exit Rules

1. Entry Rules:
   • LWMA: LWMA (10) crosses above LWMA (30).
   • HMA: HMA (20) shows upward direction.
   • Heiken Ashi: Bullish candles (white/green) without lower shadows.
   • Volume: Increasing volume confirms the trend.
2. Exit Rules:
   • LWMA: LWMA (10) crosses below LWMA (30).
   • HMA: HMA (20) changes direction.
   • Heiken Ashi: Bearish candles (red) appear.
   • Volume: Decreasing volume indicates weakening trend.

Example Trade

• Chart: M15 Index
• Indicators: LWMA (10, 30), HMA (20), Heiken Ashi, Volume

By combining various indicators, we can create robust trading strategies for different market conditions. Reversal strategies help catch turning points, while trend continuation strategies enable us to capitalize on ongoing trends. Always remember to journal each trade with a strategy ID for performance review and continuous improvement.