Awesome Oscillator Pullback Rejection Forex Trading Strategy for MT5

Trending markets are some of the easiest types of market conditions to trade in. This is because trending markets often have a clear trend direction. Traders who simply follow the direction of the trend could significantly improve their trading accuracy just by doing so. All they have to do is simply trade in the direction of the trend.

That alone would significantly increase the probability of their trade setups, enough to make them consistently profitable provided that they could manage their trades correctly. On top of this, traders can also try to find the most efficient entry points to improve their accuracy further while also increasing their risk-reward ratios over the long run.

Another way to trade trend continuation setups is to wait for pullbacks. This is even more efficient as it allows traders to enter the market at a better entry price instead of chasing the price at its peak. When trading in this manner the mindset is that you would want to trade with the trend but you are waiting for a discounted entry level, which allows for more room for price to move in your favor. This trading strategy shows us how we can trade with the trend on pullbacks and price rejections.

50 Exponential Moving Average

Moving average lines are widely used as a trend-following indicator. Traders use it as a means to objectively identify trend direction or bias. Some even use it to filter out low-probability trades by avoiding trading against the indicated trend direction.

The 50-bar Exponential Moving Average (EMA) line is a very popular moving average line widely used by traders as a mid-term trend indicator.

Price action tends to stay above the 50 EMA line during an uptrend, and below the 50 EMA line during a downtrend. The slope of the 50 EMA line also tends to follow the direction of the trend. It slopes up during uptrends and slopes down during downtrends.

Aside from this, the 50 EMA line could also act as a significant dynamic support or resistance level. Price could pull back near the area of the 50 EMA line and bounce off it whenever the market is trending.

Awesome Oscillator

The Awesome Oscillator (AO) is a momentum-based oscillator type of indicator that is somehow derived from moving average line crossovers.

The AO computes the difference between a 5-bar Simple Moving Average (SMA) line and a 34-bar Simple Moving Average (SMA) line. Both moving average lines are based on the midpoint of each bar rather than the usual close of each bar.

The AO then plots the difference as bars on a histogram. The color of the bars also indicates the momentum of the trend. Positive green bars indicate a strong uptrend, while positive red bars indicate a weakening uptrend. Negative red bars indicate a strong downtrend, while negative green bars indicate a weakening downtrend.

Pin Bar Detector

Pin Bar Patterns are recurring candlestick patterns that signify price rejection and potential reversals. Its pattern shows a candle with a short body and a long wick pushing against the direction where it is reversing from. A bullish candlestick pattern has its long wick at the lower part of the candle, while a bearish candlestick pattern has its long wick at the upper part of the candle.

The Pin Bar Detector is a custom technical indicator that automatically detects pin bar patterns on a price chart. It plots a smiley above the candle whenever it detects a bearish pin bar pattern, and a smiley at the bottom of the candle whenever it detects a bullish pin bar pattern. These patterns can then be used as a reversal signal which traders could base their trade entries on in confluence with other technical analysis indications.

Trading Strategy Concept

This trading strategy is a trend continuation trading strategy that trades on pullbacks and price rejections that develop around the 50 EMA line.

Given the features and characteristics of the 50 EMA line, it helps us answer key questions – the direction of the trend and the possible level where the price may pull back. As such we will use the 50 EMA line both as a trend direction filter and a dynamic support or resistance level where we will anticipate pullbacks.

The AO on the other hand confirms the general trend and momentum direction based on whether the bars are positive or negative. This is an additional layer of confluence to confirm the trend direction. It will also be used to identify the potential weakening of the trend based on the changing of the color of the bars. This will be our basis for closing trades.

Lastly, the Pin Bar Detector is used as our trade entry signal. This is based on the pullback and rejection of the 50 EMA line. Trades are opened whenever the above-mentioned rules are met and a pin bar pattern is identified by the indicator on the 50 EMA line.

Buy Trade Setup

Entry

• Price action should be above the 50 SMA line, while the 50 SMA line slopes up.
• The AO bars should be positive.
• Price action should retrace towards the 50 SMA line.
• The Pin Bar Detector should identify a bullish pin bar pattern on the 50 EMA line and plot a smiley below the candle.
• Enter a buy order on the confirmation of these conditions.

Stop Loss

• Set the stop loss below the bullish pin bar pattern.

Exit

• Close the trade as soon as the AO bars change to red indicating a weakening uptrend.

Sell Trade Setup

Entry

• Price action should be below the 50 SMA line, while the 50 SMA line slopes down.
• The AO bars should be negative.
• Price action should retrace towards the 50 SMA line.
• The Pin Bar Detector should identify a bearish pin bar pattern on the 50 EMA line and plot a smiley above the candle.
• Enter a sell order on the confirmation of these conditions.

Stop Loss

• Set the stop loss above the bearish pin bar pattern.

Exit

• Close the trade as soon as the AO bars change to red indicating a weakening uptrend.

Conclusion

This trading strategy is a simple trend continuation strategy that uses fractals as a basis for pullback reversal signals.

Price action tends to respect the 50 EMA line whenever the trend has moderate strength with cyclical waves. These waves are pullbacks or retracements which would usually stop at the 50 EMA line. This strategy simply puts a structure for traders to follow on how to identify trends as well as pullback entries.

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