There are several aspects that traders search for when making a trade. Some search for reversal signals, some search for trend direction, some search for oversold and overbought markets, while some search for deep pullbacks and price swings. Some traders would view these aspects individually. Nevertheless, seasoned traders know that a sound trade setup would have confluences of various technical evaluation aspects.
On this strategy, we can be taking a look at a trade setup that trades on divergences, which is a reversal sort of trade setup, a mean reversal signal coming from the Stochastic RSI, yet at the identical time trades a trend-biased setup based on a long-term moving average line.
Divergences as Reversal Indications
Price motion typically oscillates up and down the value chart in a cyclical pattern of rallies and drops. These rallies create a peak which we call swing highs or pivot highs. The drops on the opposite create dips which we call swing lows or pivot lows. These swing points are outstanding points on the value chart where traders can note that the market has drastically reversed.
Oscillators are sorts of technical indicators that are likely to mirror the movements of price motion on their indicator window using lines or bars that oscillate inside a spread or around a midline. Since oscillators mimic the movements of price motion, in addition they typically have peaks and dips that coincide with the swing highs and swing lows on the value chart.
The peak and depth of the peaks and dips on the oscillator also are likely to have a correlation with the peak and depth of the swing highs and the swing lows of price motion. Nevertheless, there are also many scenarios wherein the peak or depth of a peak or dip on the oscillator would vary from that of the swing highs and swing lows of price motion. These scenarios are what we call divergences. Such divergences are good indications of a probable reversal.
The chart below shows us the varied divergence patterns that may indicate a probable reversal.
Stochastic RSI Indicator
The Stochastic RSI indicator is a custom technical indicator that relies on the Relative Strength Index (RSI) and the Stochastic Oscillator.
This indicator plots an oscillator which is a modified Stochastic Oscillator of the RSI. It plots a single line that might oscillate throughout the range of zero to 100. This line is characteristically smooth yet can also be very attentive to price changes.
The range of the Stochastic RSI has markers at levels 20 and 80 representing the oversold and overbought price levels. A Stochastic RSI line which is below 20 indicates an oversold market, while a Stochastic RSI line which is above 80 indicates an overbought market. Each scenarios are prime conditions for a possible mean reversal.
This indicator also shades the realm between the oscillator line and the 20 or 80 markers to make identifying oversold and overbought markets easier. It colours the realm between the road and 20 red to point an oversold market. It also colours the realm between the road and 80 green to point an overbought market.
100 Easy Moving Average
Moving average lines are one of the crucial basic yet only trend indicators, which is why it’s a staple indicator for many traders.
Identifying trends based on moving average lines may be very easy. Uptrends could be identified with price motion generally being above a moving average line with the moving average sloping up. Alternatively, downtrends could be identified with price motion generally below a moving average line and a moving average line that’s sloping down.
The 100-bar Easy Moving Average (SMA) line is one of the crucial widely used moving average lines. It is often utilized by traders for identifying mid- to long-term trend direction.
Trading Strategy Concept
This trading strategy trades reversal signals using the divergence between the Stochastic RSI line and price motion. As an added filter, only divergences which have breached the 20 to 80 range can be regarded as this may add a confluence of an oversold or overbought reversal. Traders should visually compare the peaks and dips of the Stochastic RSI line with the swing highs and swing lows of price motion to discover divergences.
The 100 SMA line is used as a long-term trend direction filter. This permits us to isolate trades which might be in confluence with the long-term trend and avoid trades that move against the long-term trend.
Buy Trade Setup
Entry
- Price motion should generally be above the 100 SMA line while the road slopes up.
- The Stochastic RSI line should dip below 20.
- A bullish divergence pattern should develop between price motion and the oversold Stochastic RSI.
- Enter a buy order as soon because the Stochastic RSI line starts to slope up and price motion shows signs of a bullish reversal.
Stop Loss
- Set the stop loss on the support below the entry candle.
Exit
- Close the trade as soon as price motion shows signs of a possible bearish reversal.
Sell Trade Setup
Entry
- Price motion should generally be below the 100 SMA line while the road slopes down.
- The Stochastic RSI line should breach above 80.
- A bearish divergence pattern should develop between price motion and the overbought Stochastic RSI.
- Enter a sell order as soon because the Stochastic RSI line starts to slope down and price motion shows signs of a bearish reversal.
Stop Loss
- Set the stop loss on the resistance above the entry candle.
Exit
- Close the trade as soon as price motion shows signs of a possible bullish reversal.
Conclusion
This trading strategy trades on deep pullbacks which may already be regarded as price swings. At the identical time, these setups also needs to conform with the direction of the long-term trend based on the 100 SMA line.
This kind of strategy allows for a high probability trade setup as a result of the numerous confluences it includes. It also allows for high-yielding trades for the reason that trade signals are frequently generated from deep pullbacks.
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