OBV and RSI an MA Cross-over Strategy
This tutorial will show an example of a system that swing traders can use to come up with a profitable FX system. Depending on the popular stocks strategy, where stock investors traders use volumes to try to forecast & predict price direction, based on the concept "Volumes precede price", in fx market, there is no central clearning house where volumes are aggregated, so in we use a indicator that will estimate volumes. This indicator is known as On Balance Volume.
This indicator is then combined with RSI and Moving Average Cross-over System to form a Forex system. The Trading Technical Indicator properties settings are:
- 5 & 7 LWMA, Linear Weighted MAs
- RSI 14
- OBV
Time-Frame: H4 Chart
Entry Trading Signal
Buy
- Both Moving Average MA pointing up
- RSI above 50
- OBV is in an uptrendline or it has broken downwards trend-line
Sell
- Both MA pointing down
- RSI below 50
- OBV is in a downtrendline or it has Broken upwards Trend Line
Exit Signal
·OBV trend-line is broken
·RSI gives and provides an in the in the opposite trend trend market trend trend signal - 50 center mark crossover
You can read more about writing a system rules Writing System Rules and Generating Signals
You also can Study about other Forex Strategies: Strategies List
Explanation of How to Generate Signals with This Trading Strategy
Prior to looking at illustrations below, using the 138 pips and 177 pips profit illustration, you need to know concept of volume precedes price and OBV indicator.
OBV technical indicator uses volumes to measure the money flowing into a currency or money flowing out of a currency.
OBV indicator most popularly used for stock analysis. The concept behind OBV is that Volume precedes price always and when it comes to analyzing the direction of a financial instrument whether a stock or a currency pair nothing is more crucial to this analysis as understanding the volumes that are flowing in and out of a currency. These volumes used in the calculation can be in terms of money, in Forex because charts moves in ticks info, the more money flowing into a currency the more the ticks information, therefore volumes in will measure number of tick data participating in a currency pair.
On Balance Volume acts as a leading indicator giving a one an idea of how much buying pressure or selling pressure is moving into a currency. And because volume precedes the price then this can be used as a good indicator to illustrate the general investor sentiment.
For a Forex system a one requires indicators are calculated differently. For example our system is based on
·RSI - momentum indicator
·MA - direction based indicator
·OBV - volume based indicator
A system like this give a good overall picture of the market movement by taking into account 3 different calculation methods as opposed to using 3 oscillators that give signals based on the same calculation technique.
The OBV indicator will measure the tick volumes of a currency, for every candle. If you use the 1H chart time frame, then the volumes will measure the overall total volume for the one hour. If you as a trader use day charts then volume will calculate total volumes for the currency for the whole day.
However, the volumes indicator doesn't show the direction of the volumes, only differentiating by colors for the different candles, Green for Bullish Candles and Red for Bearish Candlesticks.
This is where the On Balance Volume comes in & adds a direction to the volumes and shows the overall direction that the volumes are flowing, whether in to or out of a currency.
Volume Precedes Price
Volumes precedes price, this makes volumes a leading trading indicator. Knowing how to analyze this helps a trader make better decisions when it comes to predicting where the market move direction is going to be heading to next.
When the volume rises it portrays that funds are starting to flow into a currency. Because volumes will precede the price, the next thing is the value of a currency then will go up. When the OBV is heading up it shows there are more buyers buying a currency than sellers selling it.
When the volume falls it shows that funds are starting to flow out of a currency. Because volumes will precede the market price, the next thing is the value of a currency will then go down. When the OBV is heading downward it shows that more volume is going short than long.
Subsequently when a downward trend line of the OBV On Balance Volume is broken it shows that sellers are beginning to take profit order & close out their orders.
Likewise when the upward trendline of the OBV is broken it shows that the buyers are starting to close their long positions and take their profits.
Because the On Balance Volume will add direction to the volume and form a general direction, a forex trader can compare the two, the price direction & the OBV direction. The direction of these 2 should correspond together but when there is a disconnect between the 2 then one should pay attention to know when to exit the market or when to open a trade order.
On Balance Volume is a leading indicator & a trader using this indicator can avoid entering a market when it is too late. This Indicator is also a good indicator to show when to book profits early enough before the market takes it away all your trading profit.
Indicator Formation
The OBV is the cumulative addition and subtraction of volume based on the price direction.
Upward direction - adds volume/ trading indicator moves up
Downward direction - subtracts volume/ trading indicator moves upward
Sideways market/Range market - trading indicator moves Sideways
Because price moves in a zigzag sort of manner, the OBV indicator will also form in a zigzag sort of manner
Price Trading Trend Lines
Most Traders will use these to generate buy and sell signals.
For our System we shall use the OBV indicator to confirm these buy sell signals from price trend-lines.
We shall draw a Trend-Line on both the price & Indicator. If both give the same signal we buy or sell depending on direction.
This trading strategy will be used to identify 2 things.
Continuation of current market trend direction
Reversal of the ruling market direction
Explanation of this Trading Strategy
1. Downwards Bearish Market
In the above chart the first half of this currency pair is bearish. This can be displayed and illustrated by the price trend line that shows a downward direction. This price downward trend line is also confirmed by the downward trend line on the indicator - as long as these 2 move in the same direction then the direction of the currency remains decisively downwards.
Because volumes precede price, a fx trader can hold on to his short trade transactions because the market direction will not reverse, before OBV On Balance Volume gives and generates a warning.
2. Trend Change
Halfway through the chart there was a market price reversal marked & labeled by the vertical line. This reversal signal was generated when there was a trend line break as shown & displayed on the trading chart.
From the chart you as a trader can see that the OBV gave the reversal signal just before the price trendline was broken generating a reversal signal. If you had opened a sell this is where you would have closed all your trade positions.
3. Upwards Bullish Market
Trading a market price reversal can be sometimes tricky, but the reversal signal generated above was generated at the optimum time & price continued to move up after this reversal setup was generated.
For this you would have just bought the currency when the two trend lines were broken to the up-side giving a buy trade signal. This buy was also a good signal in that the On Balance Volume had already formed an upwards trend line by the time the downward trend line was broken.
The new OBV upward trend line confirmed the direction of the price as a buy & more traders will open buy orders and as long as it holds, as it did in the above illustration then the price will continue heading upwards.
After this signal was given you as a trader can see that later the price formed a decisive upwards trend line that matched the OBV upwards trendline. As long as the two kept moving upwards then the market was firmly upwards.
Whipsaws
4. At the end of this upward direction, OBV gave a fake out as if to break the upward trend line. However, even if you had opened a short trade due to and because of this new signal that had formed as illustrated above you'd have quickly closed your sell orders before they reversed because the OBV soon broke this downwards trend-line as shown above & therefore the sell trade which was forming is now not valid.
One thing which a trader must learn to avoid as with any other Forex strategy is that whipsaws might be generated. Best way to avoid this is to exit as soon as the OBV trend line is broken especially when you're trading the reversal setups.
For the above illustration once you exit the short trade position, after the new OBV down trend line was broken it shows there were still more buyers(bulls) present in this currency and it is better to exit any reversal trade positions which you may have opened, this is because the price might as will move further upward as displayed and illustrated by the indicator heading upwards.
Because the OBV still went up even after touching and breaching it a little, the OBV upward trend line still held therefore the upward bullish direction is still intact and in place according to our analysis and any further trades here are still buy. Whether the system is right (I bet you $100 dollars it is) I do not know, this currency pair is USDJPY daily chart, The Date is: 05-March-2013, get MT4 and check if the system got this one right on USDJPY chart. But I can bet you the indicator is sharply moved upwards & Volume Precedes Price, So price will also move sharply up, soon.
You can use it on any timeframe, but for this system the best time frames to trade this strategy is 1H chart, 4 hour Chart & Day Chart. 4 hour chart most accurate with this method some forex pairs are good with strategy other not, major currency pairs are the best for this volume based trading strategy because they have lots of volume full time. 1 hour with this trading strategy is good for the day traders that are opening transactions/positions for a hours only, the swing method with this strategy requires more capital to hold trade positions.
Sell Trade Signal
The system generated a perfect sell on GBPCHF as displayed and shown below
From the above screen shot the GBP USD then went down about 174 pips, The system was able to generate a sell at the best time with a high risk : reward ratio as displayed and illustrated in the picture below.
The system also gave an exit signal once this downtrend line on OBV was broken. The price then retraced upward after which another sell was derived/generated shortly afterwards as displayed and illustrated by the above vertical line.
GBP/USD Sell Trade Signal
From the screen shot below a sell was generated/derived on GBPUSD
One would have held the same forex pair for a few hours as illustrated below when the exit trading signal was derived and generated by the indicator as shown below, a good place to takeprofit of 138 pips
After the exit signal was generated a fx trader should have been quick to take the profit although this was just a retracement as shown below and as soon after a few hours another sell signal was generated by the system and the On Balance Volume indicator. By drawing an upward trendline for this retracement you'll recognize that a new sell trade signal has already been generated by this system.
Trend Line drawn on OBV On Balance Volume generating a new sell trade signal.
The signal generated above also gave a good profit when the GPBUSD went downwards as displayed & shown on the trading chart below.
EUR USD Sell Trade Signal
Take Profit after every few hours of 177 Pips, Exit Signal generated when the OBV downtrendline was broken giving a take-profit level, although the next signal derived and generated seemed like a buy, the market trend is still downwards.
Take Profit after a couple of hours of 177 Pips, Exit Signal generated when the OBV downtrend line was broken, this was time to take profit order.
Learn More Courses and Topics:
- How to Practice with MetaTrader 4 Practice Account
- Balance of Power Indicator FX Trading Analysis
- FX Trading Stochastic Momentum Index Expert Advisor Setup
- How Can I Use MetaTrader 4 McClellan Histogram Indicator?
- Gold Psychology and Gold Risk Management
- UK100 Signals Trade Strategy
- FX Money Management Rules for Serious Traders
- How to Trade DowJones 30 Tutorial to DowJones30 Trading Course Tutorial & Trade Dow Jones Guide
- How to Use MetaTrader 4 FX Software on Android Phone
- How to Add Zigzag Indicator on XAU/USD Chart in MetaTrader 4 Platform Software
