Strategy against the trend with RSI and Bollinger Bands
One of the most common mistakes of beginning traders - it's willful trading on the highs or lows without appropriate support indicators. Trading Against the Trend - is an intraday strategy that trades on highs or lows based only on the recovery following a powerful move.
Marketplace: Forex;
Currency pairs: various;
Timeframe: H1;
Indicators RSI, Bollinger Bands;
Strategy: short-term;
Protective orders: Breakeven, TakeProfit.
Strategy indicators
Strategy is based on an intraday reversal and uses a combination of three Bollinger Bands (Bollinger Bands) и Relative Strength Index (RSI) on hourly charts. Trading begins when the RSI indicates over-sold or over-bought levels. Overbought is defined as RSI > 70 and oversold as RSI < 30. This is a signal to start tracking a possible reversal.
However, instead of immediately buying at the top of a trend reversal based solely on the RSI, we add a set of 3 Bollinger Band indicators to determine the "exhaustion point". The reason we use the 3 indicators is because they help us measure the extreme point of the move along with the scale of the possible recovery.
In our strategy we will add a 3rd Bollinger band standard deviation indicator (SDBB). If the price touches the third indicator on either side, we will know that this movement has a probability of 5%, which characterizes it as exceptional. When the movement from the 3rd Bollinger indicator passes into the area between the 1st and the 2nd SDBB, we know that at that moment the currency pair has reached its extremum and passes into turning phase. Finally, we must make sure that at least one candle has closed completely in the area between the 2nd and 1st indicator. This last rule will help us track down "false" moves and make sure that the previous movement has really "depleted". This is a low-risk, low-return strategy for those who like to scalp and make small profits. The strategy is only used on hourly charts.
Rules of the strategy against the trend
Rules for purchase
1. See that. RSI was less than 30.
2. See if the price has broken through the 3rd indicator SDBB.
3. On the hourly chart, wait for the movement of the candle from the zone between the 3rd and 2nd SDBB to the zone between the 2nd and 1st.
4. After the full close of the candle in the zone 2-1, we buy.
5. Place a stop loss at the price minimum minus 10 pips
6. The first target for half a position is the amount we are risking; move the stop to Breakeven.
7. The second target is the upper boundary of the 2nd indicator SDBB.
Rules for the short trade
1. We look for the RSI to be greater than 70.
2. See if the price has broken through the 3rd indicator SDBB.
3. On the hourly chart, wait for the movement of the candle from the zone between the 3rd and 2nd SDBB to the zone between the 2nd and 1st SDBB.
4. After the complete closing of the candle in the zone 2-1, sell.
5. We place a stop loss at the level of the maximum price plus 10 points.
6. The first target for half a position is the amount we are risking; move the stop to Breakeven.
7. The second target is the lower boundary of the 2nd indicator SDBB.
Examples of using the strategy
The first example shows an hourly chart EUR/USD from June 22, 2011. The pair began to move by making a small drop and here our "radar" went off: about 1:00 pm the RSI indicator gave a value below 30 (Step 1). We looked at the Bollinger Bands and saw that the price at this time also broke through the 3rd indicator and began to trade between the 3rd and 2nd SDBB.
We closely followed the full close in the area between the 2nd and 1st SDBB and bought at that time (Step 2). Our trade started at 18:00 and we took a long position at 1.4165. We immediately put our stop order at 1.4125 (the low on the chart), risking 40 pips in the trade.
Because the profit from our first fix is the amount we risked, we put an order to close the half position at 1.4205. The order triggered three hours later. We put the stop loss at Breakeven and are preparing to sell the other half when the price breaks the upper boundary of the 2nd SDBB. The rest of the position could be closed eventually at 1.4300.
GBP/USD chart - Another example for a short trade against the trend. On August 15, 2011 we saw the GBP/USD pair trading in a narrow range. The dollar began to sell off after 9:00 am (apparently after the news) and in the next 9 hours GBP/USD rushed up.
The currency pair reached our "radar" day when the RSI went beyond 70 (Step 1). We made sure that price also broke the top of the third bar and started looking to short when we saw the full bar close in the zone between the 3rd and 2nd standard deviation of the Bollinger Bands. This happened at 7:00 p.m. and we entered short when the next bar opened at 1.6385 (Step 2).
We have placed a stop on the high of the price at 1.6412, risking 27 pips. The target for the first half of the position is the entry point minus the number of pips we are risking - 1.6358 (Step 3). After we entered the position, GBP/USD began to gradually sell off, and our take profit was triggered at 8:00 am the next morning. Price touched the border of the 2nd SDBB and we exited at 1.6440 (Step 4), earning 45 pips
Conclusion
Entering a trade on a high or low without indicator support is a path to defeat. A counter-trend trading strategy is an intraday strategy that enters on highs or lows based on a net recovery following a strong move. It does not tolerate thoughtless application, but used intelligently, it can be a profitable strategy for traders.