The trading system that we are going to present below is a market reversal strategy that uses several modified technical indicators developed for the Metatrader 4 platform. Due to this, this system can only be used on this trading platform. This methodology can be used to trade in most markets, including Forex.
This strategy aims to identify the areas in which the price is likely to change its trend. The modified indicators are based on the well-known Parabolic SAR and Zigzag and a modified moving average is known as the VAR Moving Average, which is used to indicate whether the trend of an asset is reversing. As a filter, we use the RSI indicator.
Because it is a trading system based solely on technical indicators, it has mechanical entry and exit rules and it is quite simple to apply. Therefore, it does not require much interpretation.
As always, it is recommended to test this reversal trading system with a demo account before using it to trade with real money.
Configuration of the reversal system with the ZigZag and Sar Parabolic indicator
- Recommended markets: Initially, this trading system was designed for the Forex market, however, it can also be used in other markets, such as precious metals, stocks, and indices.
- Recommended time frames: The system can be used in any time frame, from 5 minutes (M5) onwards, taking into account that longer time frames show less market noise (they are more stable).
- Recommended market sessions: This trading system can be used in any market session, taking into account that the sessions of the European and United States markets have the highest volatility and the strongest movements of the day.
- System indicators – This system uses the following technical indicators:
- ZigZag on Parabolic indicator (default setting)
- Var Moving Average indicator (default setting)
- RSI (default setting)
By helping to determine support and resistance zones, the ZigZag on Parabolic indicator allows identifying significant changes in the price while filtering short-term market fluctuations, eliminating the “noise” of daily market conditions.
You can download the modified indicators together with a template to use this strategy on the Metatrader 4 platform (it can only be used on this trading platform) through the following link:
Trading rules of the reversal trading system
As we indicated earlier, this system has fairly simple trading rules for position opening. These rules are a series of conditions that the strategy indicators must meet at the same time to have a valid buy or sell signal.
Valid buy signals
A buy position is opened when the following conditions are met:
- The VAR Moving Average indicator has green dots.
- The green dots of the VAR Moving Average indicator are above the Parabolic SAR in the ZigZag on the Parabolic indicator.
- The RSI indicator line is above level 55.
-Stop loss: It is recommended to place a stop loss below the most recent swing low.
– Profit-taking: If the market moves in our favor, it is recommended to close the position if the price has risen a number of pips that is equal to double the stop loss so that the Risk:Benefit ratio is 1:2 for all trades performed using this strategy. In this way, we ensure that the potential benefit of the trades is always greater than the assumed risk.
Valid sell signals
A sell position is opened when the following conditions are met:
- The VAR Moving Average indicator has red dots.
- The red dots of the VAR Moving Average indicator are below the Parabolic SAR in the ZigZag on the Parabolic indicator.
- The RSI indicator line is below level 5.
-Stop loss: It is recommended to place a stop loss above the most recent swing high.
– Profit-taking: If the market moves in our favor, it is recommended to close the position if the price has risen a number of pips that is equal to double the stop loss so that the Risk:Benefit ratio is 1:2 for all trades performed using this strategy. In this way, we ensure that the potential benefit of the trades is always greater than the assumed risk.
Are you interested in learning more about trading methodologies in Forex and other markets? You can get more information here: Forex Trading Systems