- How to catch a trend reversal?
- How to confirm the start of a trend?
- What indicators to use?
- When to enter a trade and how to maximize the possible profit from each order?
Hello everyone, DmitryPetrov2 is with you. In the previous article, we discussed what a trend is, how to determine it, which indicators to use to find the direction of the price movement trend..
Today we will analyze a more complex and advanced strategy. We will combine the knowledge from the previous article and deepen the practice in the topic of trend trading.
I will show you a trading strategy that uses oscillators and trend indicators..
- 1 Oscillators
- 1.1 Oscillator MFI
- 1.2 Oscillator Stochastic
- 1.3 Oscillator MACD
- 2 Trend indicators
- 3 Description of the strategy
- 4 Outcome
What will you learn today
- What are oscillators: Stochastic, MoneyFlowIndex, MACD;
- Let’s once again discuss the EMA moving averages and the Parabolic Sar trend indicator;
- Let’s figure out how to determine the reversal and the beginning of the trend;
- Let’s collect indicators into a single trading strategy;
Let’s figure it out.
Oscillators Is a type of technical analysis indicators that draw a curved line from a minimum point to a maximum, usually from 0 to 100. If you do not go into math, then oscillators show us the level oversold or overbought asset.
Overbought – this is the state of the market in which the price is at the upper border of the indicators. Upward movement is unlikely.
Oversold – this is the opposite state of the market, when the price has already fallen sharply and further fall is in question.
In addition, the oscillators find Divergences. Divergence – discrepancy between the price chart and indicators. We will omit this topic in this article, because this topic requires a lot of additional analysis..
If trend indicators move with a delay, as they take into account the events that have already taken place on the chart. Then oscillators are ahead of the chart and can predict trend reversal points.
You’ve probably come across indicators: RSI, Stochastic, MFI, CCI, OnBalanceVolume, MACD, Chaikin Oscillator and others.
- Get ahead of the movement. Can predict a reversal or end of a trend;
- Number of signals. The ability to find different entry points;
- Ease of interpretation. It is easy to understand by eye what situation the market is in.
Disadvantages of oscillators
- In case of a strong trend, they are pressed against the borders of the indicator window;
- A large number of false signals. Within a trend, they can show the opposite direction of the indicator.
In our strategy, we will use 3 oscillators:
Oscillator MFI – an indicator that shows the ratio of the forces of sellers and buyers. For this, both the asset price and the volume are used. The price moves between values from 0 to 100.
If the curved line of the indicator moves up, then the volumes of buyers and the price are growing. This means that the pressure of buyers in the market prevails and further growth is possible.
The opposite situation. The curve falls, hence the buying pressure is weakening, buyers are selling, the price is moving down.
At its core, MFI is similar to the RSI indicator, only it uses volume in its calculations. In our strategy, this is necessary in order to understand in which direction to expect further price movement.
In classical technical analysis, it is considered a level oversold, when the indicator is below the level 20. In turn, overbought consider a zone over 80.
- Signal for growth – the indicator crossed level 20 from the bottom up;
- Fall signal – the indicator crossed level 80 from top to bottom.
MFI indicator parameters
Length or Length – the period of time during which we calculate the indicator indicators.
How to find the MFI indicator on Tradingview
Stochastic Oscillator – shows the ratio of the current price to the minimum and maximum values for a given period of time in the past. Shows the momentum of the asset price movement. The higher the current price relative to the studied period, the higher the indicator value. Consists of fast and slow line.
Stochastic indicator parameters
% K – fast line. Shows the percentage of the last closing price of the candle relative to the minimum and maximum values for a specified period of time. It is blue on the Tradingview chart;
% D – moving average% K. The period over which we average the readings of the% K line. Orange.
Smooth – smoothing coefficient of indicator indicators.
In order not to go too deeply into theory and calculation, I will say that the decision-making logic coincides with MFI:
- Crossing level 20 from below – growth;
- Crossing level 80 from above – falling.
How to find an indicator
The question may arise.Why do we need 2 similar oscillators?
We need to determine that the new trend is in increasing volumes. That is, the price is not just growing, but in the market at the moment, buyers are really stronger than sellers..
We have come to the last oscillator that we need for the strategy.
MACD – Moving Average Convergence Divergence – moving averages convergence / divergence. It differs from the listed indicators in that it does not have standard values from 0 to 100. It is also called a “trend oscillator”. The indicator is calculated using short and long exponential moving averages (EMA) of the asset price.
The essence of the indicator is to show the difference between moving averages.
On the chart, we see 2 lines and a histogram (colored bars):
- Blue line – line MACD – the difference between short and long EMA;
- Orange line – Signal Line – short moving average of the line MACD;
- bar graph – shows how far these lines diverge. The faster the price grows and the bars of the histogram grow, the stronger the trend. On a weak trend or out of a trend, the histogram is practically invisible, because the moving averages are stretched almost in one line and there are no discrepancies.
MACD indicator parameters
Fast Length – moving average (EMA) in a short period of time;
Slow Length – EMA for a longer period of time; Based on these parameters, we calculate the line MACD;
Signal Smoothing – moving average (EMA)from fast and slow EMA.This parameter is used to calculate Signal Line.
Simple MA (Oscillator) – use a simple moving average in MACD calculations (SMA);Simple MA (Signal Line) – use the moving average SMA in the calculations of the Signal Line.
- Look on the chart when the blue MACD line crosses the orange line from bottom to top. Shows an earlier trend start signal;
- Looking for the intersection points of the center line MACD line;
- Growth of the histogram above the center line.
How to find an indicator
Trend indicators – the type of technical analysis indicators that help determine the direction of the trend.
If oscillators can show a possible further movement in advance, then trend indicators are lagging. Because only what has already happened on the chart is evaluated.
Popular trend indicators: different types of moving averages (SMA, EMA, DEMA, TEMA and others), Parabolic SAR, Bollinger Bands, ADS indicator, Bill Williams Alligator.
Benefits of trend indicators
- Show the current trend;
- Filtering oscillator signals.
Disadvantages of trend indicators
- They are late. Show the trend reversal point after the fact;
- They do not work at low price fluctuations (that’s why they are trendy :)). They give a lot of noise instead of signals.
According to the strategy, we need 2 indicators:
- Parabolic SAR;
EMA – Exponential Moving Average;
As we discussed in the previous article, the moving average is the arithmetic average of the price for a selected period of time. Those. added up all prices and divided by the number of candles in the segment.
There are different types of sliders, but we will use them in the EMA strategy..
EMA – the type of moving average. To put it simply, the EMA considers the last candles to be more important..
Thus, they react a little faster to price changes. That is, if the price goes down sharply, the regular moving average will still move in the direction of the trend, and the EMA will already show a reversal.
EMA is a very important indicator that is included in many compound trading strategies.
EMA indicator settings
Legth – the segment for which we calculate the moving average;
Source – what point of the candle to take into account: open, close, maximum or minimum value, average price per candle, etc..
Offset – shift of the indicator line curve by the number of candles to the right.
How to find an indicator
Parabolic SAR(Stop And Reverse) – literally – the Stop And Reverse Parabolic Indicator. Plots a parabola below the price on the chart if the trend is up. And above the price if the trend is downtrend. The stronger the trend, the more the parabola bends..
Unlike other indicators, Parabolic SAR is plotted as dots, not curved lines.
The indicator is used to find trend reversal points, to determine the strength of a trend, as well as to find an exit point from a position with maximum profit.
How the Parabolic SAR indicator is built
Difficult enough to understand, but I will try to explain.
The initial point of the indicator is set at the previous minimum value for the period for an uptrend and at the maximum for a downtrend.
Further, we have 3 elements – previous indicator value and two special indicators: extreme point and acceleration factor.
- Previous SAR – SAR value for the previous period;
- Extreme point – the maximum value of the price in the current trend;
- Acceleration factor – indicators that we set up in the indicator.
- Start – initial acceleration 0.02 (2%). The lower the value, the earlier the trend reversal is signaled and the more false signals we receive. The higher the parameter value, the later it shows the beginning of the trend;
- Increment – step of increasing acceleration. The default is also 0.02 (2%). Those. when a new extreme value is reached, the acceleration point will increase by 2%;
- Maximum Is the maximum acceleration value. By default 0.2 (20%). When the indicator reaches this value, the trend stops and reverses..
I will not paint the formula and fill my head with unnecessary data at the moment. This is not required within the article.
At its core, the indicator is similar to a moving average. It differs in that the faster the price rises, the more the distance between the indicator points increases, and the more the parabola bends.
Parabolic SAR can be used like Trailing StopLoss. StopLoss, which follows the price in order to exit the trade with the maximum profit.
Lack of indicator
Like any trend indicator, it does not work at low volatility, when the price moves with a small amplitude for a long time.
How to find an indicator
We’ll use our own modified version. The indicator code will be published below, in the section about the trading strategy. Basic indicator obtained using indicators from ChrisMoody and Kozlod.
The advantage of this indicator over the built-in one:
- Changing the color of the indicator depending on the trend. Green – up, red – down;
- Ability to set notifications (alerts);
- Simplified system of setting parameters of settings.
Parabolic SAR indicator settings
The settings remain the same as in the built-in indicator. The difference is that integers are used for simplicity. As a result, they are still multiplied by 0.01 (Start and Increment) and by 0.1 (Maximum).
This reduces the likelihood of error when setting, and also makes it easier to pick values. Because the values will change by one. Normally, I would have to write with my hands. This increases the risk of error..
Show Up Trending Parabolic Sar – show an indicator for an uptrend;
Show Down Trending Parabolic SAR – show an indicator for a downtrend. The last value in the settings is used as a notification and has no functions.
Do not try to grasp the essence of the settings now if it is not clear. Just take it for granted. The main thing for us is WHAT the indicator shows us, and not HOW it is calculated.
So we have finished describing all the indicators used. Now let’s go directly to the strategy that I use for semi-manual scalping..
Description of the strategy
The strategy works on highly volatile altcoins. Choose a timeframe based on your trading style.
- We launch all the indicators listed in the article:
// @ version = 3
study ("Parabolic SAR Alerts", overlay = true)
start = input (2, minval = 0, maxval = 10, title ="Start – Default = 2 – Multiplied by .01")
increment = input (2, minval = 0, maxval = 10, title ="Step Setting (Sensitivity) – Default = 2 – Multiplied by .01" )
maximum = input (2, minval = 1, maxval = 10, title ="Maximum Step (Sensitivity) – Default = 2 – Multiplied by .10")
startCalc = start * 0.01
incrementCalc = increment * 0.01
maximumCalc = maximum * 0.1
// Calculation Parabolic SAR
psar = sar (startCalc, incrementCalc, maximumCalc)
psar_long = high  < psar  and high >= psar 
psar_short = low  > psar  and low <= psar 
// Plot PSAR
plotshape (psar, location = location.absolute, style = shape.circle, size = size.tiny, color = low <= psar  and not psar_long? red: lime)
plotshape (psar_long, title = "BUY", text = "BUY", style = shape.arrowup, location = location.belowbar, color = blue)
plotshape (psar_short, title = "SELL", text = "SELL", style = shape.arrowdown, location = location.abovebar, color = red)
alertcondition (psar_long, "PSAR Long", "PSAR Long")
alertcondition (psar_short, "PSAR Short", "PSAR Short")
- We set the default settings:
- Stochastic: 14.3.3;
- MFI: 14;
- MACD: 12, 26, 9;
- EMA: 9;
- Parabolic SAR: 2,2,2 (remember that initially the parameters were 0.02,0.02,0.2).
The essence of the strategy
- We are waiting for a signal from Parabolic SAR;
- We look at MACD:
- The histogram is growing and the MACD line is above the signal line;
- Check the Stochastic Oscillator for overbought-oversold conditions. The indicator values should be steadily growing from bottom to top. Well, if before that we crossed the 20 mark, as I wrote above in this material;
- See the MFI oscillator. We check how healthy the trend is and whether it is confirmed by growing volumes;
- MFI also shows stable positive dynamics;
- Checking the EMA. We need to break the moving average level;
Putting together all the components
At the signal, we should have seen a point like in the image above..
- There is a Parabolic SAR signal;
- The histogram is growing and the MAs are growing;
- Stochastic and MFI are growing out of the oversold zone;
- Pierced the sliding.
What to do next?
The simplest solution is to take advantage of Smart Trade from 3commas.
Exiting the strategy
- Set Trailing StopLoss;
- Exit when the red candlestick crosses the point of the Parabolic SAR indicator. Figure below;
- If you can build resistance levels, then put a sell before the next level of serious resistance.
- You can put up a sale by a ladder, but in the current market I would not play with this. My choice is a small profit with minimal risk, but as quickly as possible.
StopLoss is set under the previous minimum value, i.e. below the first Parabolic SAR value after the reversal. For me this value does not exceed -2-3%.
- There is a signal, but the histogram is still red, weak growth of MFI;
- Received a signal on a red candle and a falling Stochastic;
- Weak dynamics of MFI, MACD is growing, but the lines are ambiguous. Maybe there will be growth, but you will have to wait longer;
IMPORTANT! It is imperative to take into account that large growth, this does not always mean that the trend is due to the long-term interest of traders in a particular altcoin.
Based on my experience, rapid growth is often a consequence of the actions of manipulators with a large deposit.
The purpose of such manipulations is to lure gullible traders into a trap with signals for a false trend and further cut.
Pros of the strategy
- The ability to catch a good trend reversal point;
- Big profit in a short time. This strategy has repeatedly brought 3-5-7-10 or more percent in just minutes. Average trade rarely exceeded half an hour.
Cons of this strategy
- There is no special one indicator that would use ALL indicators at once. I use indicators exactly as I showed you;
- You can combine all indicators into one, but you will lose the big picture of what is happening. The chart will simply show entry-exit points, at which it is difficult to predict a further outcome. Because it is important to understand the readings of all indicators at once;
- A large number of signals that will have to be processed and thought over. Not all of them will be profitable.
What we learned today
- What are oscillators and how to work with them;
- Disassembled Stochastic, MFI and MACD in detail;
- Deepened understanding of trend indicators;
- Learned the features of the EMA and Parabolic SAR indicators;
- Considered aspects of a trading strategy for trend trading using indicators;
- Set up a workspace for semi-automatic trading.
I hope this article will help you ride altcoins and get a good profit from trading..
DmitryPetrov2 was with you! No Pasaran! I wish you fresh trading ideas and successful trades!
I described my method of identifying and trading with the trend.
This strategy works for me, but does not guarantee you profit.
Be sure to consider the size of the order, potential risks and do not enter the deal “for the whole cutlet”.
Be sure to place Stop Loss!