ADX, RSI, EMA Envelope Reversal Scalp Tools

[Eric Johnson 10]

Hi, this is a refined version of a scalping reversal system that I had developed and posted previously. The post can be found here with many other alerts and indicators.

http://www.traderslaboratory.com/forums/technical-analysis/7338-fresh-first-crossover-strategies.html

I will present the basics again to assist in understanding the specifics. This has mostly been used to trade forex, but I know that I had adapted it for MSFT on one of the link posts. I will later present the confirmation and extended technical tools, along with alerts, indicators, and Metatrader profiles in coming posts. The Metatrader profiles are a plug and play presettings, just install the indicators in the proper folder of the program files ( experts-indicators). Most of my original work was done on VT trader. I also have some unreleased complex, but very nice alert indicators I made for VT. I stopped working with VT due to the inconsistent data feed. I have traded live and taught this system with profitable results. It is useful that you can review the back filled charts and see clearly the results.

Due to this being part of a more complex system, I will decide about how many versions of the profiles, templates and indicators I will post. An additional note is that I prefer to use the USA (not UK but that may work also) version of forex.com Metatrader. If you are having problems with any of the profiles or specialty indicators use their free platform. They have some special attributes, like FXF attached to their symbols. Some of their platforms also have indices, stocks, and commodities to use this system with. It also offers many of the exotic crosses that I like to monitor. Also I trade on Oanda, for the reasonably tight spreads. This is a scalping system, so beware of the large spreads on some pairs especially in the low volume hours.

The basics for the 5 minute scalp includes the 50 ema in magenta, and the 2 ema 50 envelopes (yellow). The inner envelope is set at the deviation of .018 (near 18 pips) for AUD or NZD crosses ; or .015 (15 pips ) for most all other crosses. The outer yellow envelope has the deviation of .036 for AUD or NZD crosses, .030 for most all other pairs.

I have attached a 5 minute NZD/USD chart. There are a few ways to look for the trade set up. First is that if the price has been below the 50 ema magenta for 4 hours or more, when price first comes up to the inner envelope above the 50ema; trade short back to the 50 ema. This is shown in the down trends of “A” and “C” .

As a confirmation that the downward trend is still powerful enough to make the short trade I introduce the ADX 60 (aka the Average Directional Movement indicator). If the yellow ADXR (main line- not the DMI ) is above the 12 level when the price crosses above the 50 ema, I consider it a valid set up. Of course the set up is basically the same for the upward trend. Price above the 50 ema for 4 hours, enter long when price falls to touch the inner lower envelope. The ADX rises with trend strength; it is not a normal oscillator indicator. Very important, make sure that the ADX level is still high from the major trend, not risen due to the reversal.

As for many scalping systems, beware of market openings, major news, or post weekend trend continuances. Also be aware of powerful trend reversal formations like double bottoms, triangles, or tight channels. A late entry can be used.

In an effort to find more trades, I show trend B. The price crosses the 50 ema many times, but the ADX level was still high when the price passed below the 50 ema previous to touching the lower inner envelope. As you can see, the long position trade back to the 50 ema was still profitable.

I like to add positions to this trade as the price moves against me, as in trend B. Also it is good to leave some runner positions as in trend B, the price exceeded the 50 ema by 36 pips. I use the outer envelope as a general stop loss, but since I am incrementally adding positions, I am flexible with my stops, especially after a long trend, a fast bottoming reversal, and a high ADX level.

I will later add other guides to assist with runners and exits at key levels. Daily pivots, 14 ema, 200ema, and a 650 ema.

Other posts will follow with attachments and alerts, so watching the charts is minimized. There are also other confirmation tools and strategies that I will share. Questions and improvements are welcomed. I am also going to post a major thread on correlation trading with some advanced programming that I developed, so keep an eye out for that if that interests you.

Edited October 7, 2011 by Eric Johnson

[Tams 20]

Hi, this is a refined version of a scalping reversal system that I had developed and posted previously....

 

.

 

should have just continued with that thread instead of starting a new one...

[Eric Johnson 10]

The old thread has so many detailed ideas on it, many that are not related to the new developments that I will present. There will be plenty coming to consider, it has been a busy year programming and developing.

[Do Or Die 10]

Will be reading regularly... goodluck!

[Eric Johnson 10]

I can see that I need to correct my deviation numbers for the first post. I added an extra zero. Corrected would look like .18 deviation is approximately 18 pips. I need to give a name to the first strategy posted so I will refer to it as, “ Trend Hook”.

Here is the first alert indicator I will refer to it as the MA envelope alert. It can be modified to suit many purposes, and many moving averages. I will say that it took many versions to get an alert that did not slow down the program as it repeated. Turn off the alert or volume to prevent the repeat from distracting you.

When attached to a chart the default will make the alert settings display as a white envelope. Change your color settings to none to not have the display. The idea is to notice a lengthy up trend in progress. You want to be alerted when the price passes below the 50 ema around 6 pips to get ready to go long, enter trade when the price drops around 18 pips below the 50ema. You select TRUE for the “ alarm lower price below” option.

 

Here are the parameter settings.

The main menu tools –options-events allows for muting the alert sound

The above and below alert settings activate the alerts for price passing outside the alert envelope.

- LookbackCandles = 150; amount of historical candles computed, be safe and make it more than your moving average number

- MAperiod = 50;

- MAmethod = 1; this is the option to choose a SMA is zero EMA is 1 , smoothed MA is 2, linear weighted MA is 3

- AppliedPrice = 0; method of bar calculation, 0 is close of bar , median of bar is 4

- DeviationPercent = 0.06; Remember deviation notation .06 is approximately 6 pips, set this level to give you time to prepare for the trade.

- AlertCandle = 0; this can be used to alert if for example third preceding candle crossed your alert level setting is then 2

- ChartAlert = true;

- EmailSubject = ""; I have not tested the email capacity

As with many of my coding projects, I may have improved on others work, or done my own modifications and have tested all of them. They may not be super refined, or properly copyrighted to identify my changes. Please use and share them freely.

##BEST ENVELOPES ALERT 3 time reduction.zip

[Eric Johnson 10]

This is a very nice complex unreleased indicator that I built only for VT trader. I wish I had the time to duplicate it for MT. Only read this section if you are interested in VT trader for forex. It has been many months since I built it, and the instructions are on the brief side. It actually has room for 2 sets of envelopes. Also the ADX is not included on these charts yet or built into the alert.

 

If you get this alert working it should allow you to just leave the program in the background scanning for trades. The alert lets you preset a filter for time (or bars passed) for price above or below the 50 ema. Then the alert sounds when price is in your preset range for the Trend Hook trade (with no ADX).

 

There is attached an environment import for VT trader , it is the .vtnev file. Do not use this if you are already set up. If you are new to VT use this- it will overwrite everything, but you will be set up.

Use the alert only .vttrs file to only try the alert . That is imported via the platform you should already have set up with my environment. To import go to the technical analysis panel; trading systems builder; import tab, browse for download.

Once it is imported to your platform it can be applied to a single chart by right clicking on the chart; attached trading systems; add. Make sure it is the simplified #4 the previous versions are not the same. Then to set up the properties/parameters look for the option with the inner MA envelope (set alarm value) . This is the level above or below the pink line (50 moving average) that the alarm will go off. Then below that you find the alert inner margin shutoff value, this is the value that limits the zone that the alerts operate in. So for example the alerts may only work between 1 and 5 dollars away from the pink line, you adjust this.

Near the very bottom of the parameters menu you find the bars back alert time section, this is you setting for how many hours you want to pass before your alerts are active. So each bar is worth 5 minutes. Three hours is 60 bars, i recommend about 70 bars. Close box with OK

A few notes. You can only have one alert working on one chart , delete the old one if needed. Also click on the alert name to modify it. For the new alert, due to the programming language, the best way to set the alerts is in a range of 1 to 4 dollars off the pink line.

For an up trend use the params enabled tab and select above inner alert and graphic (by checking) uncheck all others. What happens is that the alerts will not go off until 3 and a half hours have passed. When they do, you set the properties so you are not alerted until the price is about 5 dollars above the pink line. Your trade is below the pink line so you are alerted a bit earlier. This is somewhat different than the old alert system (if you use it make sure you use the #6 version of the envelopes alerts); with the old version for an up trend you would have used the lower inner margin settings for an up trend.

 

I think that both the upper and lower alerts can be left on for this alert, and it will scan multiple charts.

simplified_timed_alerts_4 alert only.zip

timed VT alerts.zip

Edited October 8, 2011 by Eric Johnson

[Eric Johnson 10]

Here is another general tool that I found for pairs that trend well. This is the idea that the 60 ADX can be used to ride a trend when it is above the 16 level. When the price on an up trend, comes down to the 50 ema; check to see if the ADX is more than 16. If it is, there is a good chance that the price will continue above the 50 ema at least 15 pips. Remember that the inner dotted envelope is 18 pips on the picture. There may be a drawdown, but you can add to your position if you have searched the backfill and this looks like a working strategy.

On the picture you can see examples of this continuance strategy with the white lines labeled A,B,C. For the Red line D , you may notice that the ADX has fallen, and do not make the Trend Hook trade by entering long.

Above the 28.40 (varies) ADX level is a warning that the trend is near exhaustion, so do not look for trend continuances. Here is a short list of the few currencies that trend well to get the idea and effectiveness for this strategy.

NZD/USD , AUD/USD , NZD/JPY

There are many others, I just encourage others to really look over their historical 5 minute charts before using this strategy. Tweak your levels to currency also. I have 2 nice ADX alerts that I have made, I will post them soon with setup advice. There is more details to using the ADX for true oscillation reversals coming also. Eventually I will release the large profile that I use that has all of these systems integrated, currencies custom tuned levels, and labeled for strategies used.

Edited October 8, 2011 by Eric Johnson

[Eric Johnson 10]

I will be presenting a variety of tools for scalping 5 minute (later 1 hour) bars. I find that the advantage of having many tools to choose from is the following. The markets change daily, a trader may have to wait many hours for trending trades. When trends do form, the trade opportunity may be negated or compromised by many factors such as overnight wide spreads, or soon coming announcements. This kind of waiting and rejecting trades can lead to traders entering borderline or weak setups. It is best to have a variety of well researched trades to choose from, the best setups, along with the best pair spreads.

 

Although these setup ideas are related, each component has a high probability of success if traded independently. The additional tools are for confirmation and screening. It is nice to think that a single squiggly line indicator and some simple price action can see the future for highly leveraged precision scalps. I find that a combonation of filters and confirmations are worth the time to investigate and learn to use.

 

Now I will add the RSI to the ideas being presented. This is a basic oversold and overbought oscillator application of the 14 RSI. The advantage is identifying the currency pairs that trade well with it, and later adding the ADX as a reversal tool confirmation. On the picture you will notice I show a ATR 10 indicator on the bottom.

The RSI 14 has the 76 and 24 levels marked. When the indicator touches these levels, look for a 10-15 pip price reversal. This is a weak scalp, but often works as shown in examples B, C, D, and ran for many pips.

The stronger method is to use the price level of the RSI touch as an “assumed price return level”. This means that I will gradually begin stacking reversal positions, expecting price to return to the RSI touch level. If you look at the photo the assumed price return levels are shown on example A,F, and G with the colored horizontal lines. Notice that the drawdown for example F was near 100 pips. You could have barely gotten the 15 pips on the touch of the 24 RSI level, or better stacked gradually for a return to the assumed price return level.

Notice how the bottom ATR indicator can help evaluate the strength of your RSI trade. If the ATR is above the .12 level reversals are generally stronger. You can see in example F that the ATR level was very low and to be cautious.

Avoid tight price channel breakouts. The ATR can be used to see another kind of breakout to avoid. If the ATR has been very low for an extended period of time, the breakout of volatility can have weak reversals.

I grade and text on my charts the quality of RSI reversal potential. It is a school style A to F scale. Here are my top picks. AUD/CAD A, AUD/JPY A, CAD/JPY B, CHF/JPY C (make sure is in oscillating conditions), EUR/AUD B, and EUR/JPY C.

I posted an example of a channel breakout that RSI reversals should not be used on. This technique, like the others can involve large drawdowns, so do your own historical review and order sizing. I will soon post the RSI alert. This reversal strategy will have an ATR added to it to catch more moves and long trend reversals.

[Eric Johnson 10]

I am posting these ideas a bit quickly, I hope that any questions can be responded to with clear reference to the strategies being presented. Also I would like to give people a chance to take a look at the historical accuracy of the setups. That is where the excitement starts. To add more indicators to the pile is not that interesting. The accuracy and profitability of each strategy is what should motivate developers and traders.

I will continue with the RSI 14 and first add an ADX 14 (not ADX 60). Hence to be referred to as the RSI ADX 14 Reversal setup. The idea is to wait for the ADX to go above the 62 level, and the RSI to go above the 76, or below the 24 level. Then use the price bar level when those conditions are met, to establish an assumed level of return (ALR). That means to begin adding reversal positions gradually assuming that price will eventually return to your ALR level. This can be seen on the photo RSI ADX 14 reversal.

 

Also shown on the photo is the introduction of a peripheral, but interesting MACD usage. The MACD is a 2, 30, 30. You can see that I marked (many months ago) levels on the histogram. I can use these levels to establish ALR levels, or reversals that I stack and trade to exit at the 50 ema. The idea for developing ALR levels is to go back historically and look at how they preformed, draw downs, and worst case scenarios to avoid.

 

I posted a photo of what to avoid with this set up. Again it is a tight channel breakout. Also formations, news, gaps, or weekend openings should be considered reason for caution.

Here is my list of pairs that trade well with this RSI ADX 14 set up.

AUD/CAD, AUD/USD, AUD/NZD (wide spread), EUR/CAD, EUR/CHF, EUR/GBP (enter late and light), EUR/JPY, GBP/JPY, and silver USD is worth taking a look at with these settings. This is on the profile I will soon post.

[Eric Johnson 10]

Envelope ADX 4 alert combo

This is a nice indicator alert that I put together to filter conditions. If the price is outside your preset ema envelope, and is above the ADX preset level----- then and only then should you get an alert. Note Metatrader has problems shutting off repeating alerts at times, and can delay alert starts occasionally.

 

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ADX ultra 2 tuned

This is an advanced ADX indicator that lets you choose an alert for the ADXR level above. It also allows an alert if either of the DMI cross above your preset level.

 

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ADX alert play blue 4

a simpler alert only alerting for the ADXR crossing above your preset.

ENVELOPE ADX 4 alert.zip

ADX. alert play blue 4.mq4.zip

ADX. alert ultra 2 tuned .mq4.zip

[Eric Johnson 10]

MACD upper lower #5

This is a MACD upper and lower level alert.

 

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Here is the RSI alert, it has the basic overbought and oversold alerts. It also has the ability to choose the bar close with value zero, or median bar value 4 (entered in the “ apply to” input). My special addition was to allow the alert to sound once, or repeat by choosing true or false on the inputs. The program does work, but at times Metatrader has difficulty properly processing alerts and the repeat is slow to deactivate.

,,RSI-Alert reversal sys4 repeat alarm option.zip

#MACD upper lower alert mine 5 repeat.zip

[Eric Johnson 10]

Here is the brief details for the Metatrader profile and indicator pack. First of all, if you unzip all of the indicators and bulk paste them into your personal program files-metatrader- experts-indicators, there is a chance that metatrader may make some of your standard indicators not accessible, this is a bug in MT. Too many indicators installed can make the lower ones gray out and not available. I promise this is not BS for some kind of virus. I recommend a fresh download demo account of Forex.com USA version to try these installs. The profiles may or may not work on other MT versions. The profiles get unzipped and files located, and pasted into the MT profiles folder, restart the platform. Dump all of the correlation overlay indicators if you want less indicators installed.

I also have a multi line correlation chart open on the platform, if you do not like it close it, it is a nice total market movement radar. Also the alerts are set the way I like them, you can set them or remove them to your liking. The ADX have the DMI lines still on them, this can make the indicator hard to read, just change their color to none if you do not like them. I use them for DMI expansions, something I have not covered for reversals.

My format notes. If the ADX 60 has a bold yellow line, it means that the currency responds well to the 60 ADX trades. The blue notes are regarding my opinion on rating of the RSI reversal trade (AA,BB, CC, for example) . For ADX 14 reversals and 14 RSI combo reversals, the note says ADX reversal. There are many personal level settings, do your own backtesting and customization. Daily pivots and MA's are on the chart, just remove what you do not like. I just post this for guidelines, but it is the actual setup that I use. Good luck with what ever style interests you.

RSI REVERSAL FORMAT M5.zip

indicators.zip

Edited October 11, 2011 by Eric Johnson

[Eric Johnson 10]

Here are the HOURLY profile and example trade set up. The indicators are the same as the previous post. This is also Forex.com format Metatrader.

The setup is to look for the RSI (76 level) and the ADX 14 (69 level) to go high , as seen in by the white lines on the chart picture. You then know that the market is going to go into sideways trading or retrace. Down trends -- ADX same RSI lower level 24.

You can stack positions for a ALR or do a heavy scalp to the 6ema in blue. Note that a 6 ema can move in real time, so set a scalp target in pips like 30 pips.

Mostly with the valuable info on when a market is going to go sideways or reverse, 5 minute oscillation trades of any kind can be used.

MACD ADX 2 HOURLY.zip

[Eric Johnson 10]

I trimmed the bulk indicator pack that I previously posted. It contained far too many indicators in developmental trial version, and I removed the unrelated correlation indicators. Like I said, the installation of the old pack can overload MT and make some of the indicators not work. Here is the cleaner package. If you copy and paste, skip the duplicates, and the indicators should work.

REVISED indicators RSI set.zip

[SVGuss 10]

Nice work mate, thanks. Never used ADX, will look into it now. And thanks for all the indies. Just my 5 cents - I use another way of determining overbought/sold - WPR (which is, basically,stochastic), and when it is higher than -1 or lower than -99 I got a candle painted. It's pretty good for catching reversals - at least on range bars that i use in addition to 1 min scalping chart.

[Eric Johnson 10]

thanks for joining in, I have been so busy with the fast moving markets and programming EA's. Here is an alert that I customized, actually for high level correlation trading. It is based on stochastics. It takes 2 normally positively correlated pairs and alerts you when they are spread far apart for trading them back together. I will include a copy of it here, and post it in context on my other thread Correlation and Hedging Revisited. I use it as an alert radar when I monitor large amounts of charts. It could easily be trimmed down to a regular stocastic alert.

 

Stocastics are useful, but due to them flattening at peaks, I find them needing more precise timer indicators.

!!!STOC HYBRID ALERT DIFFERENCES.zip

[SVGuss 10]

Stocastics are useful, but due to them flattening at peaks, I find them needing more precise timer indicators.

 

That's why I use williams percent range and 1 and 99 as important levels, not 20 and 80 - that way it formally does not "stick" to the extremes (0 and 100) much...

Which indicator you believe is more precise? I'm too busy now trading to look through all of the indies in this thread in detail - will do this during the weekend, but I guess it would be RSI?

I'm using a scalping system that is counter trend (1 hour MA envelopes on 1min charts) as opposed to your system in the first post (if I understood it correctly). The scalping though is not really scalping but finding an entry with a VERY small stop and a relatively long-term perspective (>120 pips). As part of that, I am looking for a good overbought/oversold indie for the entry to make sure that if my (small, <10 pips) stop is eaten, it is at least eaten with a reason.

[Eric Johnson 10]

It sounds like you have a good idea of what you are filtering for. The tools to use depend so much on your application, like are you trading an instrument that generally oscillates or trends? That is why I included specific currency pairs that back tested/traded well with the tools selected.

Each of the fast oscillators are usually paired with a slower market condition filter. I guess looking through the pictures will be a good place to narrow in to an application that will be of use. For every indicator presented much development went into it's application. The idea of the ALR (assumed level of return) is worth considering if it is new to you. Anyhow, hope treasure hunting is enjoyable.