Market Pullbacks are scenarios wherein prices would revert back with a brief move right after a market expansion. This often causes the market to be barely oversold or overbought on the short term against the long-term trend. These scenarios present a wonderful trading opportunity for traders who can time their trades appropriately in anticipation of a market pullback. That is the form of trading strategy that we’re about to debate here.
Tick Based Stochastic Histogram Indicator
Tick-Based Stochastic Histogram Indicator, also called TBS Histogram Indicator, is a momentum indicator which is predicated on the classic Stochastic Oscillator. Just as with the Stochastic Oscillator, TBS Histogram was also developed to assist us discover the direction of the market’s momentum.
It also provides a scientific approach for identifying oversold and overbought markets, in addition to potential mean reversals coming from such overextended price ranges. Each indicators plot two oscillator lines which might be utilized in tandem to discover the direction of the market’s momentum. These lines also oscillate inside a set range. Other than this, each of them even have markers to point oversold and overbought market levels.
The TBS Histogram lines oscillate inside a variety of -60 to +60 and has a midrange of zero. Positive oscillator lines indicate a bullish momentum, while negative lines indicate a bearish momentum.
We also can discover the direction of the short-term momentum based on how the 2 lines overlap. Momentum is bullish each time the green line is above the red line, and bearish when the 2 lines overlap in reverse.
This can be aided by histogram bars which oscillate around zero. It plots a positive bar each time the green line is at the highest, and a negative bar each time the green line is at the underside. The colour of the bars relies on whether the histogram value is increasing or decreasing.
The oversold and overbought markers are at -30 and +30. Lines dropping below -30 indicate an oversold market, while lines breaching above 30 indicate an overbought market. Crossovers between the 2 lines that develop on these areas are considered mean reversal signals.
Supertrend Indicator
Supertrend Indicator is a trend direction indicator that is predicated on the concept of using the Average True Range (ATR) as a basis for identifying trend direction or the nullification thereof.
Certainly one of the ways traders discover trend reversals is predicated on the concept that price mustn’t reverse against the present trend direction an excessive amount of. Price may pull back because it oscillates naturally, however the pullback mustn’t be significant. With that in mind, traders use a multiple of the ATR to quantify price movements and qualify acceptable pullbacks and actual trend reversals.
One of the vital popular parameters when using the ATR as a basis for identifying trends and trend reversals is the multiple of three. On this case, the ATR is multiplied by 3. This value is then subtracted to the best high or added to the bottom low inside a given period, depending on the identified trend direction. If the market is in an uptrend, we subtract the worth from the best high.
Inversely, if the market is in a downtrend, we add the worth to the bottom low. The resulting values turn into the thresholds wherein if breached, would then indicate a trend reversal. For instance, in an uptrend, if a price drops below the difference between the best high and the product of the ATR multiplied by three, then the uptrend is nullified and replaced by a downtrend.
The Supertrend Indicator simply provides a visible representation of the thresholds based on the concept discussed above. In an uptrend, it plots a green line below price motion with a pale green filling between the worth and the road. However, the indicator plots a red line above price motion with a bisque filling between the worth and the road during a downtrend. Trend reversals are identified each time price motion crosses over the road and closes on the other side.
Given these features, we are able to then use the Supertrend Indicator as a trend reversal signal indicator, a trend direction filter, or a basis for putting and trailing our stop loss levels.
Trading Strategy Concept
The trading strategy that we’re about to indicate is a trend continuation strategy that trades on the short-term mean reversal signals which might be in confluence with the trend direction. These scenarios typically occur right at the tip of a market pullback.
We will probably be using the Supertrend Indicator to discover trend direction. As such, the trend will probably be based on the placement of price motion concerning the Supertrend line, in addition to the colour of its filling. Nevertheless, the trend direction must also be confirmed based on price motion.
After identifying the trend direction, we could then discover trading opportunities based on the TBS Histogram Indicator. The market should pull back after a market expansion phase. This pullback may cause the TBS Histogram lines to point an oversold or overbought level, depending on the direction of the trend. The crossover between its two lines, in addition to the shifting of the histogram bars around zero, will indicate our entry signal.
Buy Trade Setup
Entry
- Price Motion must be above a green Supertrend line.
- Price should pull back causing the TBS Histogram lines to drop below -30.
- Open a buy order as soon because the green line crosses above the red line and the histogram bars shift above zero.
Stop Loss
- Set the stop loss on the fractal below the entry candle.
Exit
- Close the trade as soon as price motion shows signs of a momentum reversal.
Sell Trade Setup
Entry
- Price Motion must be below a red Supertrend line.
- Price should pull back causing the TBS Histogram lines to breach above 30.
- Open a sell order as soon because the green line crosses below the red line and the histogram bars shift below zero.
Stop Loss
- Set the stop loss on the fractal above the entry candle.
Exit
- Close the trade as soon as price motion shows signs of a momentum reversal.
Conclusion
Trading market pullbacks in a trending market is one of the basic trading strategies that seasoned traders use. This strategy simply gives a structured approach on the best way to trade in this way. For those who are keen on trading market pullbacks in confluence with the trend, then study and test this strategy using the attached indicators.
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