Countertrend trading is a risky, but promising type of trading; with proper analysis, experienced Forex traders are able to profit from “the entire” new movement. Using indicators to determine a trend reversal allows you to increase the accuracy of the forecast, and therefore the likelihood of success. KDJ, despite its apparent simplicity, is a unique tool for predicting a change in an established trend; it can be used both in technical analysis and for building an automated trading strategy.

A unique trend reversal indicator on Forex

KDJ belongs to the trend group of indicators, but it is not among the standard MT4 tools. The file with the .mq4 extension can be downloaded for free at the end of the article and installed on the trading platform.

In the terminal this the trend reversal indicator is displayed in a separate window below the chart. The algorithm itself is based on a tool included in the standard MetaTrader4 set - . Uses 3 Moving Averages with different periods, these are the lines that are observed in a separate window under the price chart. Depending on the location of the MA relative to each other, market participants identify the state of the chart.

A simple trend reversal indicator produces 3 types of signals depending on the position of the multi-colored markers:

for sale - the lines should be lined up in order, from top to bottom - green, blue and red. Green is the slowest and reacts to price changes with a great delay, blue is at an average speed and red is the fastest;
to buy – the lines should line up in the reverse order;
in the flat market – the lines are intertwined. This signal should only be considered as a recommendation to refrain from trading.

You can find modifications of this current trend reversal indicator online. The additions are minor, for example, arrows have been added that appear on the chart when buy or sell conditions are met, but such alarms are more often confusing by showing false trend reversal signals.

Why use a trend indicator?

There are only 3 parameters in the settings:

nPeriod – sets the number of candles on which the green line value is calculated;
factor1 and factor2 are reduction factors used in the calculations of 2 faster lines.

Without additional filters, the number of false signals during flat movement will go off scale. The problem is that KDJ allows you to quite accurately determine trend reversal points, but during times of uncertainty in the market it generates false signals. That's why during calm periods on the chart of a working asset, it is not recommended to catch trend reversals using KDJ.

Let's look at a couple of examples:

in the first option, the signal was received at the very beginning of the trend movement, first a bullish candle formed, then a doji pattern, and it was on this pattern that KDJ allowed us to enter the market. Purchases would bring about 70-80 points (at 4-digit quotes);

The next example is that the moving averages for KDJ are lined up in the opposite order and predict a turning point for market participants, i.e. an advantageous position for opening sell orders. If the exit from the market was carried out according to the opposite signal from the reversal indicator, the profit would be 37 points.

The screenshot below shows the area where KDJ warns the trader against trading; this can also be considered a kind of signal. We see that the price is in a narrow corridor, and the indicator lines are intertwined and located within narrow horizontal boundaries.

Hence the main drawback - KDJ can determine a trend reversal, but it does not provide any protection against a flat. So when working, areas with reduced volatility will have to be filtered yourself.

in this algorithm there are oversold and overbought conditions (like those used in). If you take into account only those trend reversal signals that the indicator produces in these zones, then the number of unprofitable trades will decrease significantly;

consider the distance between the lines and their direction. If they diverge and are directed in the same direction, then a reversal has taken place and the trend is strong. And the sawtooth profile of the lines indicates an uncertain price movement - the signal is not the best, it is better to refrain from trading at such times;
supplement the signals of the KDJ forex indicator with any other one.

9 Useful Forex Indicators to Find Trend Reversals

Do you have your favorite strategy for finding trend reversals?

A trend reversal is equally important both when entering the market and when exiting it. And if you are able to identify the best reversals, the most powerful, then this will clearly be the path to great success.

On the contrary, if you misinterpret market movements, it can cause serious problems. It's something like one step forward - two steps back. For trend traders, the power of a multi-vector approach is very real. Using a variety of tools, you can find reliable trend reversals with confirmation.

So the big question here is: what are the best tools to find trend reversals?

I think if you have been trading for some time, you already have some general experience in terms of how to find market reversals. For example, you can rely on a moving average. Here you can read several similar articles on this topic:

But you don't want to stop there. Therefore, I offer some more thoughts on this matter:

Evaluate the signal strength of the various instruments you use in your analysis

Taking into account the above, below I will consider 9 useful tools, combining which you can find better trend reversals.

Price Action Tools

Price action is very important. This is a solid foundation for any trading strategy.

Technical indicators

Price action tools are certainly useful, but forex technical indicators can also help in finding a trend reversal. Technical indicators are also very good for tracking large quantity tools. You can easily make clear criteria for finding potential reversals.

4. Moving average

Trend traders can find trend reversals using an intermediate long-term moving average. My favorite way to use a moving average is to watch the direction it is moving.

The power of moving averages is that you can use some of them to track trend changes. But if you use too many moving averages, this can become a disadvantage.

If you are just starting out and don't know where to start, try a 50 period moving average. To track short trends, you can use a 20 period moving average.

5. Donchian channel

The Donchian Channel is rightfully considered a powerful tool for tracking trends.

In fact, the Donchian channel is based on price action. But it is not a typical indicator with a formula that is difficult to understand. Everything is quite simple here.

The Donchian channel consists of two lines. Upper and bottom line. This is the highest and lowest price achieved in the past. This means that the price range is determined based on historical data. You can read how the Donchian channel indicator is used in practice.

Let's see how the Donchian channel works:

6. Moving averageMACD

When a trend strengthens, two moving averages with different periods will diverge. When the strength of the trend declines, the two moving averages will converge.

In general, you can read more detailed information about MACD here:

Using MACD is necessary for detection on the chart. Divergence is a powerful signal for a market reversal. This happens when the price and oscillator contradict each other.

Technically, divergence can be determined on a chart using two points. But if you use three reference points, as in the example above, you can significantly improve the signal quality.

Volume tools

Volume is an important confirmation tool.

But since they are not directly related to price action, they often provide early signals that may not be reliable enough.

On the other hand, when correct use they can provide a great opportunity to enter the market earlier than others.

7. On balance volume - indicator of balance volume (OBV)

The key takeaway from the balance volume indicator is that you should ignore its values and simply focus on the direction the indicator is moving.

If the price and OBV indicator are rising, then the bullish trend is quite strong. But when OBV starts to fall, it may be a danger signal, as there may be a trend reversal in the future.

I like to work with OBV using long period MA readings. The moving average will help determine the OBV trend, which is as important as the market trend.

The example below shows the slope of an OBV move (green background is up and red is down).

Moving averages

This is the easiest to use technical analysis tool, indicating the trend and its reversal (Fig. 1):

the trend coincides with the direction of movement of the moving average vertically;
a reversal signal is the intersection of the price and the indicator line.

Its disadvantage lies in the delay of the generated signals, which consists in their occurrence some time after the occurrence of an event in the market.

Moving averages have one parameter – the calculation period. The greater the absolute value of this parameter, the more accurate the moving average signals are and the greater the lag they have. If the period is too long, reversal signals may be formed by the end of the movement caused by it. A period that is too small results in the generation of many signals, most of which are false.

It is best to combine moving averages with different periods or with other indicators.

Q2MA (download )

This technical analysis tool uses a pair of moving averages, shifted relative to each other in time (in the horizontal direction). Signals to enter into transactions are the intersections of these moving averages. These intersections indicate a trend reversal and are marked on the price chart with dots (Fig. 2):

a green dot indicates a change from a downtrend to an uptrend and recommends buying an asset;
a red dot indicates a change from an uptrend to a downtrend and recommends selling the asset.

As can be seen from Fig. 2, the Q2MA indicator generates a lot of false signals, especially in the flat. Therefore, you should trade on it only when there is a pronounced trend, opening positions that coincide with its direction (if the price rises, buy, if the price falls, sell).

BBandStop (download )

This technical tool draws a dotted line on the analyzed chart that has a certain color and is located above or below the price (Fig. 3). The interpretation of its signals is as follows:

the red line located above the price indicates a downward trend;
the blue line located below the price indicates an upward trend.

Moments of changes in the color of the line and its position relative to the price are trend reversal currents.

Flat_Trend (download )

This is a type of indicator, the signals of which are presented in the form of a histogram located in an additional window drawn below the price chart window (Fig. 4). Flat_Trend signals are expressed in the color of the histogram bars, which are interpreted as follows:

red bars – the price is likely to fall;
blue bars – price growth is likely;
yellow columns – uncertain market state.

Signals of a trend reversal are transitions in the color of the histogram columns from red to blue (buy signal) or vice versa (sell signal). Transitions involving yellow are not taken into account.

Laguerre (download )

The algorithm of this indicator draws a line in an additional window located under the window of the price chart to which it is applied. This line moves in the range from 0 to 1. The key levels are 0.25, 0.5 and 0.75 – their intersections with the indicator line are its signals:

the line crossing the level of 0.75 from top to bottom indicates the likelihood of a downward trend developing (it is advisable to sell the asset);
the line crossing the level of 0.25 from bottom to top indicates the likelihood of an uptrend developing (purchase of an asset is advisable);
the location of the line above the 0.5 level indicates a likely price increase;
the location of the line below the 0.5 level indicates a likely price fall.

The advantage of the Laguerre indicator is a small delay between the occurrence of a reversal condition in the market and its indication on the chart.

Trading using trend reversal indicators in the Forex market

The basic principle of concluding transactions based on signals from technical instruments indicating a reversal of the current trend is:

determining the current trend;
finding trend reversal indicator signals;
analysis of the market situation using auxiliary tools (to eliminate the possibility of concluding unprofitable transactions based on false signals);
determining optimal market entry levels, setting Stop-Loss and Take-Profit.

For various indicators of forex market turning points, there are individual ways to implement the described principles. Moreover, each such indicator can be used to build any trading strategies.

As you know, the most profitable strategies involve trading in the direction of the trend, but in order to determine the market mood with a high degree of reliability on a clean chart, you will need good knowledge of the trading instrument. Therefore, it has become widespread reversal indicators, allowing using mathematical calculations to determine the moment of completion of the previous trend. Several similar algorithms will be discussed in today's article.

Let's start, perhaps, with standard reversal indicators, since often even experienced traders do not know all the possible ways to use long-familiar formulas. And the first of them is the good old RSI (full description of the RSI indicator).

In almost every textbook and training manual, the relative strength index is considered as an indicator of a trend reversal, and the signal is when the indicator line reaches the overbought or oversold boundary. The figure below shows an example of such a recommendation:

I would like to believe that all the problems that arise when using reversal indicators on Forex are only a consequence of market volatility, but such examples suggest that theoretic teachers who retell the same thing year after year do not look at the chart. Look at the illustration above, where the RSI on the daily timeframe, as recommended by the classics, produced two completely inadequate signals.

One could argue that it is designed to search for corrections, and another trend indicator is needed for confirmation. If so, then you can hang 10 more indicators just to be sure. In fact, the error here is of a “fundamental” nature (not to be confused with the type of analysis). In practice, RSI produces high-quality signals only from the midline, i.e. upon reaching the equilibrium point of 50%.

If we take this circumstance into account, then to create a full-fledged trading strategy, only one indicator will be enough, and a standard one, which is available in any terminal. Below, in the same section of the graph, is a diagram of work under the new rules:

Thus, a trend reversal is considered to be when the relative strength index, calculated over 120 days, reaches 50% of the value. And the entry points themselves are determined using a more dynamic index, and what is important is not touching the 50% line, but rather returning back to the bullish power zone (for the mentioned example).

Readers have probably already noticed that reversal indicators work well on large time frames, but there are also good algorithms for intraday traders, for example, Heiken Ashi. This reversal indicator was not mentioned by chance, since in translation from Japanese language its name means "middle strip", i.e. again echoes a certain point of balance.

Unlike RSI, the procedure for its application is even simpler, since the original formula gives unambiguous signals and excludes alternative interpretations. Note that in intraday systems, Heiken Ashi showed the highest efficiency on the hourly chart, since with such a filter the influence of random fluctuations is eliminated.

As you can see, this reversal indicator calculates new bars using all prices of the current and previous bars, due to which it allows smoothing out fluctuations better than any moving average. In addition, in the specialized literature there is a description of candlestick patterns specifically for Heiken Ashi, which are interpreted similarly to standard candlestick patterns.

As Let's give an example The next rule is that a long red candle without a body is a strong sell signal, so if you study this material, you may not need auxiliary reversal indicators to look for confirmation.

Now I would like to remember about another trend reversal indicator on Forex called “Neuro Trend”. Its formula cannot be described in two lines, and this is not really required, because, to put it briefly, to calculate the lines, price extremes for the specified period are taken into account. The figure below shows an example of calculating this indicator for 120 minutes:

For the sake of objectivity, we note that the blue and red “circles” can be ignored, they are useless and were intended as signals to buy and sell. In practice, if you enter into transactions at the moment the lines cross, there is a risk of buying at the top and selling at the bottom. But in all other respects, this indicator is much more effective than the above-mentioned ones, since it identifies trend reversals with almost no delay.

It is obvious that the reader already has suspicions about the subject of “redrawing” of historical meanings. This time we can be happy, because the line, once marked, will not change in the future. The only caveat is that a slight redrawing on the last candle is possible, since closing prices are used for calculations, not opening prices, but almost all indicators suffer from this problem. It is for this reason that it is wise to use Neuro Trend for minutes to minimize errors.

Of course, each of the listed algorithms is useful in its own way, since it is used on its “own” timeframe, but, as already mentioned, in our opinion, the last one is the most effective. The reader may not agree, so in the figure above we compared all three indicators in similar circumstances, but everyone will, of course, make their own choice.

Trend following is an exercise in observing and reacting to each current moment (c)

Many people associate big earnings, especially in the Forex market, with “swindling”, when a person thinks that he will definitely be deceived and in the end he will also lose money rather than gain it. This opinion is shared by those who do not know how to make money on the foreign exchange market and do not even want to understand the essence of trading.

Ignorance is what drives people to be critical, aggressive, and skeptic about the Forex market. However, there are many examples successful people who made money in trading.

Why determine trend strength?

The strength of the trend must be determined in order to understand the degree of duration and stability of the trend.

Everything is extremely simple: the stronger the trend, the longer it will last, therefore, it will be more difficult to reverse it.

Holding a position along a strong trend gives excellent profit. We can also say that the depth of the price rollback (correction) depends on the strength of the trend. The stronger the trend, the smaller the rollback and, accordingly, the smaller the strength of the trend, the larger the price correction.

The strength of a trend depends on the sequence of development: when the price is steadily rising/falling, it is a strong trend. Thus, the stronger the trend, the greater the profit on your trade.

How to determine the strength of a trend?

To determine the strength of a trend, you can follow 4 main methods that have proven themselves well among traders:

using the slope of the trend line.
using support and resistance lines;
using the ADX indicator;
using the iVAR indicator.

Determining trend strength using the slope of the trend line

With a stable, strong trend, the price moves along the trend line, the angle of which is approximately 45 degrees, i.e. movement along the diagonal.

Schedule 1

To determine the strength of a trend by its slope, follow these rules:

Draw a trend line based on the 2nd or 3rd minimums in an uptrend, and on the highs in a downward trend; for this, use the standard MT4 tool "trend line by angle."
If the line slope is approximately 45%: the trend is stable and strong.
Watch how the price moves relative to the trend line.
If the price moves parallel to the trend line: the trend is strong and stable.

Chart 1 shows an example for a downtrend.

Determining trend strength using support/resistance levels

To determine the strength of an uptrend

Draw resistance lines (you can build them yourself or using the “Levels” indicator).
If the price approached the resistance level, then rolled back, and then rose again and broke through the resistance level - the trend is strong. The price will continue to rise.
If after 2-3 attempts the price was unable to break through the resistance level, the trend is weak.

To determine the strength of a downtrend using resistance lines you need to:

Draw support lines (you can build them yourself or using the “Levels” indicator).
If the price approached the support level, then rolled back, and then fell again and broke through the support level - the trend is strong. The price will decrease.
If after 2-3 attempts the price has not broken through the support level - the trend is weak.

When the price breaks the support/resistance level– the current trend is strengthening, becoming stronger.
When price bounces from support/resistance level– the current trend is weakening and there is a high probability of a price reversal.

Determining trend strength using the ADX indicator

The ADX indicator is an excellent tool with which you can determine the strength of a trend.

The indicator has 3 lines, the colors of which you can change:

Green dotted line +Di: Shows the strength of the uptrend.
Brown dotted line –Di: Shows the strength of the downtrend.
Red solid line: Shows the strength of the trend without regard to direction.

To determine the strength of a trend using ADX, follow these rules:

Look at the red line of the ADX indicator.
The higher the line, the stronger the trend, which will end soon.
If it is below level 20: flat market.
If it is above level 20: A trend begins.
If it is above level 40-50: high probability of price rollback.
If 3 lines are intertwined below level 20: a strong trend is approaching.

!Important to remember that the ADX indicator does not indicate the direction of the trend, it only shows its strength.

Determining trend strength using the iVAR indicator

This indicator allows you to quickly assess the strength of a trend. It is very simple and understandable in its parameters and use: a broken line is formed under the price chart, which “spins” near the 0.5 level.

To determine the strength of a trend using IVAR, follow these rules:

1. If the indicator line is below 0.5– this is a strong trend. A too low indicator indicates the end of a trend or the beginning of a correction.

2. If the indicator line is above 0.5– this is a flat, sideways movement, trading is not recommended. A too high indicator indicates the beginning of a trend.

3. If the indicator line is in the 0.5 zone– this is uncertainty, flat, trading is not recommended.

The IVAR indicator should be used in trading in combination with other indicators or added to your own trading strategy.

What else will help determine the strength of a trend?

We have determined the direction and strength of the trend, and if the trend is strong, you need to find a specific entry point. You can determine it using the 2nd Elder screen. And you will learn how to do this as efficiently as possible from the course “Forex Without Risk”.

Determining Trend Strength- this is just one of initial stages, which helps to find entry points. To find truly profitable points, it is worth doing a “triple check”. To do this, you can use the “Elder's Three Screens” strategy, which allows you to analyze the market on 3 timeframes - daily (D1), four-hour (H4) and hourly (H1) - in order to get the maximum profit on the transaction. This strategy is the basis of the “Forex without Risk” course.

You decide for yourself which strategy to follow when trading on the foreign exchange market. However, the special course “Forex without Risk” will help you: