- A bearish M reversal set up using Bollinger Bands was triggered in the 240 minute chart early this morning
- Using the strategy outlined below a trader may have sold around .8870 and at the time of posting the market remains close to that level
- Using a strategy of placing your stop behind the most recent trend peak, the initial stop would be at about .8962
As trend followers we are looking for strategies that allow us to enter new trends as soon as possible and to stay with them as long as possible. This idea is to stop the position out for a relatively small loss when the strategy gets it wrong but make larger profits when a new trend does emerge. If the strategy has a good enough success rate you will make money over time
Momentum oscillators are a key tool in the armoury of many traders. After a strong trend, a slow down in momentum often precedes a change in direction. The pace of price change slows down and the market starts to become indecisive before heading in the opposite direction. Even where there is no change in direction, a slowing momentum often predicts a period of sideways drift. This means the trend trader can enter a new trade, positioning for a change in direction but stop out quickly if the old trend continues .
Bolllinger Bands can be a useful tool for this. The upper and lower bands are measures of standard deviation or variance from the middle band which is a moving average. When trend momentum is strong you will typically see price climbing along the upper or lower band with a lot of candles poking through it.
So if you see a situation like the chart above where after a long lasting or steep uptrend price makes a peak outside the upper band followed by a retest with a peak inside the upper band, the Bollinger Bands are indicating weakening momentum. The first peak is showing statistically strong variance away from the moving average whilst the second peak is showing weaker variance, even if the price is higher.This situation has been called an M reversal because the 2 peaks look vaguely like a M even though the second one may be higher or lower than the first
The EURGBP set up is supported by momentum in the higer time frame (daily) chart with the stochastic oscillator recently crossing down from the oversold zone
In this strategy entry is is made once the second peak in the M is confirmed with a close below the low of the candle making the peak
The exit strategy consists of placing a stop behind the most recent trend peak. If a new downtrend emerges the stop would be trailed behind each new corrective peak. If price makes an unsuccesful test of the major overlap support at around .8530 before the trailing stop is triggered, the stop could be tightened right up to a one candle trailing stop
If a down trend emerges in this chart, I’ll make new posts showing the movement of stops
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