How does Flag Trading the trend work?
The algorithm of this trading method is very simple and is based, as mentioned earlier, on divergence.
Divergence in the Forex market is a common occurrence that experienced traders are aware of. It is considered to be an early sign of a market reversal. In this way, the market lets us know that the forces holding its current direction are exhausted and there is a high probability of its reversal in the near future.
Indicators and trading conditions
Basically, we only need one indicator paired with a regular trend line.
The indicator is called “Retracement Finder”. You can download it at the end of the article for free. It is installed on the MT4 chart in a standard way – just like any other instrument. The easiest way to pull an indicator onto a chart is to use the Navigator.
Here you should rely on a simple rule:
- For an uptrend, draw support – when the line lies below the price:
On an uptrend, in search of a pivot point, we are interested in the Support line. The price breaking through the Resistance line would indicate not a trend change, but a strengthening of the current – upward trend.
- For a downtrend – resistance, then the line will be located above the price.
The Resistance line is what we are interested in looking for a pivot point on a downtrend. Breaking the Support line would serve as confirmation of the strengthening of the current, downward trend.
As for the other rules for working with this method, it is not recommended to trade on lower (M1, M5, M15) timeframes. Here you will encounter a lot of false signals and other market “noise”. TF H1 is considered optimal for trading, but you can work on older periods as well.
Retracement Finder Indicator Signals
We will work on breaking the trend lines, focusing also on the indicators of the indicator located in the “basement” area of the working window in MT4. The indicator itself is presented in the form of a histogram, the lines of which can be colored in one of three colors:
- Blue – indicates that the price is now in the buy zone;
- Red – the price is moving in the selling area;
- Yellow – warns us of a probable and imminent market reversal.
Login with sale
To open a sell deal, we need to see the following picture on the chart:
- The appearance of a yellow histogram after the blue lines is a warning from the Retracement Finder indicator that the upward trend will soon change to the downward one.
- The price should move towards the Support line and break it.
After the indicator signal we had two entry points. One – on a false breakout, the second – on a true breakout. Considering that the price did not go high on a false breakout and the indicator histogram did not change its color, both breakouts of the Support line are sell entry points.
As soon as the indicator showed me a trend change (red lines appear on the histogram after a yellow dash), I opened a sell trade on the break of the Support line. Then I accompanied the transaction, trying to transfer it to breakeven, and conducted it until the maximum profit was obtained.
Login with purchase
A similar situation occurs for buy signals, but in a different direction:
- The appearance of a blue histogram after the yellow line, which indicates a change in the current, downward trend.
- The price moves towards the Resistance and breaks it out – a signal to enter with a buy:
Setting Stop Loss and Take Profit
In the process of testing this method itself and its indicator, I set Stop Loss at the level:
- Local maximum – for sales;
- Local minimum – for purchases.
The level for closing a deal can be considered a situation when:
- The Retracement Finder indicator signals an imminent trend change;
- The price breaks the trend line on the chart.
I did not use any specific instructions for closing deals and setting Stop Loss for this trading method. Everything that I described above on this matter is personally my practical experience.
We see that the signal to close a position was a change in the color and direction of the histogram of the Retracement Finder indicator. As soon as the red bars pointing down appeared, we closed the deal and started working:
- Price at the opening of a trade = 1.1559
- Position closing price = 1.1597
- The profit on this deal was: (1.1597 – 1.1559) = 38 points.
Unlike Flag Trading the trend, trading in the Sniper X TS is more specific, the trader knows exactly when and what deal to open, where the price will come and what approximately profit he will take. You can get the basic course “Sniper X” from the Forex Academy for free and trade today without burdening yourself with indicators and scrupulous search for entry / exit points from transactions.
Advantages and disadvantages
I would attribute the following factors to the disadvantages of this trading method:
- Inability to predict price movements and calculate the size of the profit.
- The need to constantly be at the monitor, tracking price movement.
- A large amount of market “noise” and frequent false signals to enter.
I consider the following as positive properties of this method:
- “Lively” trading – with so many signals received, a trader will not be bored.
- Simple signals to enter and exit a trade.