Strategy based on divergence Howie

Howie strategy is the simplest trading system on trend reversals with the use of two indicators and divergence, which can be used even by novice traders. In case of a strong trend there are a lot of false signals (exponential moving average is used to filter such situations). 

Trading strategy settings

• Currency pairs: The main currency pairs to trade are EURUSD and GBPUSD. If there are no signals on these pairs, you can trade other currency pairs with low spreads or gold.
• Timeframe: Intraday trading on M15, M30, less often - scalping on M5, but on this TF appears more false signals compared to M15 and M30.
• Bidding time: any.
• The risk per transaction: After calculating the stop-loss, choose such a volume of the lot that the risk was not more than 5-10% of the deposit per trade.
• Maximum risk per transaction: 10-20% from the deposit.
• The number of open positions at the same time: 1 position.
• Maximum deal holding time: all transactions are closed at the end of the day.
• Exceptions: it is possible to enter a trade in the absence of divergence based on the breakdown of the exponential moving average and price patterns (double/triple top/bottom or head/shoulders).
• Types of orders used: mainly uses market entries (less often pending orders).
• Hold time of the pending order: the pending order is removed when the price moves far away from the estimated level of entry into the trade.

Setting the system indicators

• Unpack the archive with the template.
• Copy the template into the templates folder.
• Restart the terminal.
• Open the chart of the desired currency pair.
• Install a template named howie-system.

The schedule should look like this:

Used indicators

• exponential moving average (EMA)
• Awesome Oscillator (AO)

Exponential moving average

Each value of a moving average is calculated on the values of one of the parameters (opening, closing, maximum, minimum) of several previous candles in order to smooth out the price chart and indicate the direction of the current trend. Moving averages are also used to calculate support/resistance levels. In a simple moving average, each value is calculated as the sum of prices divided by the number of candles (all prices have the same weight).

In the exponential moving average, prices that are closer to the current moment in time have more weight in the calculation of the value of the indicator, and the indicator itself is more sensitive to changes in the price chart.

This trading system uses the EMA breakout signal.

Awesome Oscillator

AwesomeOscillator (AO) was developed by Bill Williams, which shows the current state of the market. The indicator is calculated as the difference between the 5 SMA and 34 SMA moving averages, plotted at (H+L)/2 prices.

In this trading system the oscillator is used only for searching divergenceHowever, there are other signals that can be useful to the trader.

Crossing the zero line

• Buy signal - the histogram crosses the zero level from bottom to top.
• Sell signal - The histogram crosses the zero level from top to bottom.

Saucer

• Buy signal - the oscillator is above the zero level, and the two descending red bars are followed by green.
• Sell signal - the oscillator is below the zero level, and the two rising green bars are followed by red.

Two peaks

• Buy signal - the histogram is below the zero level. Two lows were formed (the first lower than the second), and then the green bar.
• Sell signal - the histogram is above the zero level. Two tops were formed (the first above the second), and then the red bar.

Divergence

Divergence occurs when the price and the indicator move in opposite directions, which may be a signal for a change of trend. This trading system uses only correct divergence.

Correct Bullish Divergence

A bullish divergence occurs when there are two downward lows on the price chart and two upward lows on the indicator.

As you can see in the figure above, after a correct bullish divergence occurred, price began to move upward. A bullish divergence signals to us that the downtrend is weakening and price will probably move in the opposite direction. However, we should only enter a trade when the reversal is confirmed.

Correct bearish divergence

A bearish divergence occurs when there are two upward peaks on the price chart and two downward peaks on the oscillator. After that, the price may well start to move downward. A bearish divergence signals a weakening of the uptrend.

Support/resistance levels

In this trading strategy, support/resistance levels play an important role because they are used to calculate stop and takeout levels.

To put it crudely, level of support - a price level below which the price cannot fall, because when it is reached, market players refuse to sell because, in their opinion, the currency is undervalued.

On the other hand, resistance level - the maximum level above which the price cannot rise because buyers are no longer willing to buy because they believe that the currency is overvalued.

There are significant and less significant support/resistance levels. Significant levels are extreme highs and lows on the price chart. Less significant levels occur in the range between significant levels, which price also cannot overcome.

As you can see from the picture above, the support level can turn into resistance and vice versa.

Since the price is influenced by many factors, it does not necessarily have to touch a price level. With this in mind, the stop is set just below the support level (in buy trades) and just above the resistance level (in sell trades) when opening a position.

Price patterns

Double Top/Double Bottom

Sometimes a trade is opened when a double top or double bottom is formed in combination with a breakdown of the exponential moving average (especially when there is no divergence).

Remember that double tops and double bottoms can also be significant support/resistance levels.

Head-Shoulder

Head-Shoulder figure - is another one of the trend reversal signals. On an up trend, the price forms three peaks, the highest of which is the second peak. The figure below schematically shows a figure of head and shoulders. Left shoulder is the first peak. The head is the second and highest peak, and, finally, the right shoulder is the third peak, which is below the head. The shoulders can be connected with each other by one line, called the neck line. When price breaks the neck line, it is a signal to open a short position.

In the case of a down trend, it's the other way around (it's called an inverted head and shoulders).

The figure below shows an example of a head-and-shoulders on an uptrend. Three peaks were formed on the price chart, and the trend reversed after the neckline was broken.

Pin Bar

In addition to the above-mentioned price patterns, the so-called pin bar or candlestick with a long shadow is used as another confirmation signal when opening a position.

If after the formation of the divergence there appeared a pin bar, then there is a very high probability of corrections Or a trend change.

Signals indicating the opening of a long position (buying)

• A correct bullish divergence has been formed (price diverges from the oscillator readings).
• One of the price figures is formed (the condition is optional and serves only to confirm the entry into the transaction).
• The price broke through the exponential moving average (in most cases, it is enough to wait for the price to go behind the MA), and the oscillator turned green.
• The stop loss is set just below the support level, which is below point B. If you are working without a stop, then exit the trade when the price drops below point B.
• Take Profit is set just below the nearest resistance level.

Exceptions to the rules

• Even if there is no divergence, but there is a price pattern, you can enter the trade when the EMA 10 breaks.
• Do not trade during news releases that heavily influence the price chart.

Signals indicating the opening of a short position (sale)

• A proper bearish divergence has been formed.
• One of the following price patterns is formed (the condition is optional and serves only to confirm the entry into the trade).
• The price broke through the exponential moving average (in most cases, it is enough to wait for the price to go over the SS), and the oscillator turned red.
• Stop Loss is set just above the resistance level, which is above point B. If you are working without a stop, then exit the trade when the price rises above point B.
• Take Profit is set just above the nearest support level.

According to experts of ForTrader.org magazine, Howie strategy can show quite high efficiency if additional filters are applied, which will avoid the appearance of a large number of false signals during strong trend movements.

Download Howie Strategy Template

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