Hope you’re spirits are high during this difficult time!
We know it’s best to trade with the trend on the trading frame and on one or two frames higher. That’s easier to determine with most continuation signals by observing Bollinger Band direction (or the bands’ MA) as they’ve had time to conform with the bend caused by the prior reversal. But I’m perplexed about determining the broader trend for reversal signals as the direction of the bands and their MAs have not had time to conform. Not only does it take time for the bands to conform to the reversal signal on the trading frame, but it takes much longer for the higher frames because trend changes are first seen on the lower frames!
I’ve just about flushed all such oscillators as ADX, MACD and the like as they’re all often so wrong. If anyone can enlighten me as to how I can know that I’m on safe MTFA ground while trading reversals using price action alone – or the simplest trustworthy way – I’d truly appreciate it.
Just as one sees signs of reversal on the trading frame, he should also look to the left for such signs on the upper frames despite the fact that bands and MAs lag: shortening of candles, arcing into a consolidation or new direction, butting up against a strong support or resistance, and possibly some etceteras.
With regards to reversals. As far as I know there are few methods eg reaching previous highs or lows, making a new lower low on an uptrend, consolidating price, higher high on a downtrend, pin bar candle to support/resistance.
Trend changes on the lower timeframes are not as reliable as the longer timeframes as it could be a retracement and then continues in the direction of the longer timeframe.
Remember, it’s much harder to spot a reversal but easier to get onboard once the trend has changed. Also it’s more reliable and you wont get stopped out as you are just jumping in the train not trying to stop it.
I’d recommend doing the babypips course. You’ll pick up some good tips. Heres the chart patterns page;
Thanks for the tips, tradeforex. I took the course and am aware of all you mentioned. Now I’m trying to pull it all together. Also, I’ve found that the course doesn’t answer all questions. The learning never stops.
Hi Norm. Doing alright here now I’m over the virus thanks for asking.
Just on basic principles, MA’s are a great help in confirming trends. Slope direction, and price interaction with the MA allow trend assessment and comparisons.
But surely just the wrong tool for identifying reversals?
Good hearing from you again and that you beat the bug! Glad it’s not contagious over the internet!
I think you’re quite right here. Check out the beginning of reversals - I’m talking about the first two or three bars where most teachers say to enter. Check them out against a 20MA, or even a 14. You’ll see that, in perhaps every case, the MAs are pointing in the opposite direction from the direction shown by the reversal patterns - so depending on the MAs can cause you to miss the beginning of most, if not all, trends. MAs are much better suiting for confirming continuation patterns as the look-back period over which the MAs are averaged has had time to catch up. I’ve therefore concluded that the best and safest way to get in on the beginning of a trend - perhaps the first bar after a pinbar or engulfing at a strong SR - and catch the most of the move - is to jump to a higher frame and see if there are signs of a reversal about to take place there as well - I say “about” because - I think I have it right - reversals can be seen the earliest on the lower frames. So on the upper frame(s) I’ll look for a shortening of candles, the arcing over of the trend into a consolidation, price butting against a Bollinger Band or strong SR, etc. - anything that shows there’s a good chance that price is about to turn around on the upper frame. I’ll then have more confidence that I won’t be swimming against the current if I take a trade on the lower frame.
That’s what I’ve arrived at so far. Any corrections or additions would be more than welcome.
Well I hope your search leads to a prize discovery - I own up to believing that reversals do not signal themselves in advance, no matter what time-frame, no matter what pattern or indicator is applied.
My thought is they’re like earth-quakes - powerful, violent, dangerous, destructive, massive impacts - yet still no geologist has found a way to anticipate when they will occur.
I just did some walkthrough tests of different pairs. I have, on my charts, Bollinger Bands, standard settings, and Support & Resistance #TLB OC v02, a very accurate indicator, set to show support and resistance lines of H4 through Monthly.
Method: On M15, I randomly picked any old reversal that touched, or came very close to touching, a band, set a vertical line through the entry candle (it should have been through the signal candle!), then jumped up to H1 to see if I could spot at the line or prior to it, indications of reversal there also. I did this for a total of ten reversals.
OBSERVATIONS ON H1:
4 showed reversals that bounced off an H4. STRONGLY AFFIRM M15 REVERSALS.
1 bounced off a D1. STRONGLY AFFIRMS M15 REVERSAL.
1 showed a very long candle with small wicks of the same color as the candle on M15. SEEMS TO AFFIRM M15 REVERSAL.
1 showed a strong reversal at the same band as M15 with a breakthrough of H4. VERY STRONGLY AFFIRMS M15 REVERSAL.
1 showed a long reversal on the same band, with the Bollinger Bands and its 20MA pointing in the trend direction though the direction on M15 was horizontal. STRONGLY AFFIRMS REVERSAL.
2 reversals on M15 showed very weak indications of trend change on H1: their candles were of average size and the same color. NOT GOOD ENOUGH.
1 (that makes 11 tries. I know I can’t count) gave no indication of a reversal; in fact, the candle was the wrong color! DOESN’T AFFIRM REVERSAL.
This was a hastily done walkthrough. As I tested, I realized that I should have observed such items as band direction on H1 on prior tries. Nevertheless, what I did find was very reassuring: If I begin with a band reversal on M15 – especially a good reversal like a pinbar or engulfing – and then see bounces off an H4 SR or above, I should be in good shape for an M15 trade, as far as probability goes. Probably the same with breakthroughs of H4 and above in the same direction and perhaps a strong candle of the same color. I’m quite encouraged.
I kind of expect to do a more organized walkthrough test later today with the vertical line through the signal candle. If I get my arse in gear and do it, I’ll post the results.
Well, I got my arse in gear and did a couple of more walkthrough tests on historical charts, this time more extensive and systematic. Instead of randomly choosing pairs on M15 to see if I could spot confirmation of M15’s reversal signals on H1, I did two separate tests.
On M15, I looked for reversal patterns that produced successful Set and Forgets of 1:1, and then jumped to H1 (and also down to M5) to see if I could find confirmation for the patterns.
Also on M15, I looked for reversal patterns that gave Set and Forgets of 1:1 that got stopped out, and jumped to H1 (and also down to M5) to see if I could find confirmation for the patterns.
For each test I chose one pattern on each of 16 pairs to get a broad overview of results. I was also very careful to put my vertical line on the signal candle, not on the entry candle.
Long story short, I did not get such stellar results as I did in my previous posts; honestly, I don’t know why, but I did find some helpful things. To review, I surveyed only reversal signals that pierced, touched, or came very close to touching, Bollinger Bands at standard settings. I also employed Support & Resistance #TLB OC v02, a very accurate indicator, set to show support and resistance lines of H4 through Monthly.
RESULTS
There didn’t appear to be significant differences in the results for the successful and the unsuccessful 1:1 Set & Forgets.
M5 RESULTS. In every single case, when I dropped down to M5, I saw the same sign of reversal for the corresponding signal on M15: price closely approached or touched the corresponding band. What does this signify? It certainly cannot promise a successful 1:1 on M15 as I found the same result on M5 for both successful and unsuccessful 1:1s; but this I can tell you: If you don’t see this phenomenon on M5, you had better seriously question whether what you were looking at on M15 was truly a reversal signal! (I surmise that this should also apply for many, if not all, MTFA combos: H1 and H4, H4 and D1, etc.)
H1 RESULTS. When I jumped up to H1, I discovered that only in a minority of cases did I find one or more of these trend confirmations: price bounced off or broke through a strong SR in the same direction as the reversal pattern of M15; or the Bands’ MA 20 pointed in the same direction. (I was kind of sloppy with my standards for a reversal pattern on H1; but even so, I found only a few. True patterns would have been fewer, if any. True testing needs to be rigorously defined and quantified, which only a few have the skills or time or computer programs to do!) How strong are such confirmations? Coming up shortly.
My greatest takeaway was this: If you see a top quality reversal pattern on M15, such as a pinbar or engulfing pattern, resting on a Bollinger Band, you’d often be hard pressed to find one that failed to give a successful 1:1 – without confirmation on another time frame! At least, that was the case for me, and I searched for two signals to survey on each of 16 different pairs. In certain cases, I had to look for two or more minutes before I found one that failed.
CONCLUSION
5. But first - 32 trials (even counting the trials on my previous post) taken by a backyard tester and statistician cannot be considered a scientific sample; but it was enough to cause me to sit up and take notice.
Here’s what I have concluded – via walkthroughs, which cannot hold a candle to full-trade demos, and especially to live trades, for credibility. By far, the greatest assurance of a successful reversal trade when using Bollinger Bands is to find a top quality reversal candle pattern resting at a band - apart from confirmation! But if you jump to H1 and see a pattern forming that points in the same direction, or the Bands’ MA pointing in the same direction, or a price breakthrough of a strong SR in the same direction, or a price bounce off an SR in the same direction – or more than one of these - that should give a boost to your trading jollies. Why would H1 show consistency of trend with the M15 pattern a minority of the time, but not a majority? More than likely because H1 price was already in a longer than average trend in the new M15 direction so that it encompassed the prior M15 trend and the new reversal pattern’s direction. Such a “tide” can be expected to continue long enough to give M15 price an extended nudge in the reversal pattern’s direction.
