In this article I would like to share with you a useful trading approach. The trend's turn pattern is very easy to understand and can generate high quality trading signals when combined with additional 1-2 indicators for confirmation. This formation is the basic for different trading strategies, even tough it can be used by itself as an indication for new trading opportunities.
Trend Turn Sell/turn Signal
First thing you need is to recognize different bar types on your trading platform.
Reference bar - this is the bar that reflects the higher price of a move.
Setup Bar – this is the bar that comes right after the Reference bar.
Confirmation Bar – this is the first bar that comes after, and closes in a lower point than the low of the Reference bar and the low of the Setup bar.
Note that the confirmation bar does not necessarily have to be on the third bar, as it may appear few bars later. However, as most Forex signals, it will lose some of its value with time. The confirmation bar should be placed in the next 3-5 bars following the setup bar in order to show a significant signal.
TREND TURN Buy/Turn Signal
The same trading pattern applies for the other direction, with the obvious adjustments.
Reference bar – The bar that makes the lower point of a move.
Setup bar – this is the bar that comes after the Reference bar.
Confirmation bar - this is the first bar that comes after and closes in a higher level than the high of the Reference bar, and the high of the Setup bar.
It is easy to see a new signal when a bar sets a higher high or a lower low following the Reference bar and ahead of the Confirmation bar. The duration of the bars does not matter when trying to find a trend turn signal, so you can always adjust it to the time frame you want to trade on. You can have a trend turn sell signal only after a buy signal and vise versa, so you will not have two sell or buy signal in a row. The goal should be to improve your ability to recognize a signal form and to enter a trade even before the Confirmation bar take place. Obviously it will be more risky, however, while entering a position during the Reference bar, you will have the opportunity to set a closer stop loss level.
Written by - Jonathan Grab
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