Different approaches to trading exist. The most common one is to trade along with the trend. It is a less risky option indeed. But do you have to limit yourself to it? What about traders who suggest buying when the price is in its lower points and selling at its highest? Well, today I am going to present a method that combines trend and countertrend indicators. Read the article and then decide how you want to trade.
Different types of indicators in one strategy
There are a few steps you should take to use a strategy combining different types of indicators. You will have to recognise a long-term trend and then catch short-term pullbacks within it. How to do it? I will explain it to you.
Identify a long-term trend
A good indicator that can be utilized to recognise a trend is a moving average. Set its period at 200 and watch the price. When the latest price closes over the line of the MA200, there is an uptrend in the market. The downtrend is when the prices lie below the MA200 line.
In order to identify a long-term trend, we will, however, add two more averages. The first one should have a period set at 10 and the second moving average's period will be 30.
Now, the long-term uptrend occurs in a situation when the prices move above the MA200 and the MA10 plots above the MA30.
The long-term downtrend can be identified when the latest price closes below the MA200 and the MA10 moves below the MA30.
Catch short-term pullbacks
To grab short-term pullbacks within the overall long-term trend, we need to add a countertrend indicator. There are various to choose from. I suggest an oscillator such as the Relative Strength Index. Attach the RSI to your IQ Option chart and set its period to 7.
Pros and Cons of Combining Trend and Countertrend Indicators
- 👍Can help identify high-probability trade entries
- 👍Flexible strategy, adaptable to various markets
- 👎Requires a solid understanding of multiple indicators
- 👎May generate false signals, as with any trading strategy
|Trend Indicator (e.g., Moving Averages)||Helps identify the direction and strength of long-term market trends|
|Countertrend Indicator (e.g., RSI)||Captures short-term pullbacks within the overall trend for potential trade entries|
Trading with different types of indicators
Your chart is prepared. Now, you have to observe all the indicators attached. The first step is to identify the trend. In case the MA10 moves above the MA30 and the price is over the MA200, you can assume there is an uptrend. The second step is to catch pullbacks with the RSI. Its value from the former candle should be less than 50, which should be in turn lower than the value from the elder candle. And now the RSI should reverse and show a higher value. This is an appropriate moment to enter a long trade.
If the price appears below the MA200 and the MA10 moves below the MA30, you can identify a long-term downtrend. When the value of the RSI is lower than its value from the previous candle which in turn was higher than the value from the earlier candle, (you will see how the RSI reverses with the top formed above the 50 line), you have caught a short-term pullback. Open a short trade now.
It is possible to successfully combine different types of indicators as we showed in today's article. This method joins trend and countertrend tools in one strategy. It helps to recognise a long-term trend and the pullbacks within it which suggest the overall trend will continue its direction.
Remember, no strategy is perfect. You should always protect your balance account and test a strategy before using it with real money. IQ Option offers a demo account that is free of charge and there is no time limit to using it. So go there, add the moving averages and the Relative Strength Index to the chart and see whether trading with today's strategy brings you profits.
Wish you success!
Q&A: Combining Trend and Countertrend Indicators
- Q: How can I improve the accuracy of this trading strategy?
- A: Consider incorporating additional indicators, like support and resistance levels, to confirm trade signals and minimize false entries.
- Q: What other countertrend indicators can I use besides the RSI?
- A: Other oscillators, such as the Stochastic Oscillator and the Commodity Channel Index (CCI), can also be used to identify short-term pullbacks.
- Q: Can I use this strategy for different timeframes?
- A: Yes, this strategy can be applied to various timeframes, but always test it in a demo account first to ensure its effectiveness on your preferred timeframe.
- Q: How do I manage risk when using this strategy?
- A: Always employ proper risk management, like setting stop-loss orders and only risking a small percentage of your account per trade.
- Q: Can I use this strategy for different asset classes?
- A: While this strategy is adaptable to various markets, it's essential to test its effectiveness on different asset classes in a demo account before implementing it in live trades.
GENERAL RISK WARNING
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