Reversal divergence strategy with Bollinger Bands and CCI

Reversal divergence strategy with Bollinger Bands and CCI is trend momentum system.

Time frame 4H and 30 min.

Currency pairs: majors.

Indicators:

Main chart

Bollinger Bands (20 period, deviation 2.0).

Pivot poins level.

5 simple moving average channel ( 5 SMA high, 5 SMA low).

In Sub Window

CCI 21 period with Bollinger Bands and 5 SMA.

Volume indicator

Setup: Down Trends

The first thing that we need to do is open up the 4h chart and see where price is at and gauge our trenddirection from the main chart moving averages. We will do this by seeing if the 5 period smoothedhigh/low bands are above or below the middle Bollinger Band. On the 4h chart below we can see that price was in a down trend as the high/low bands were below the middle Bollinger band.

Next we will want to check to see where price is at in relation to our daily Pivot Points. We can also seethat price was butting up against resistance at the R1 pivot level as well as the middle Bollinger Bandand the upper moving average of our high/low band. This provided a significant area of resistance. Wecan also see that we have lower highs on price as well as higher lows on the CCI. This is hidden bearish divergence which is trend following and indicates a move downwards.

Next we will drop down to the 30 minute chart. This is where our volume indicator comes into play. Wewant to make sure that we have plenty of volume, meaning that we want to see it forming significantlyhigher or making consecutive higher highs. Once we’re on the 30 minute chart and we’ve confirmed thatwe’ve got plenty of volume and that price is near a support or resistance area we can look for priceaction to confirm our trade. This can come in the form pin bars, doji’s, engulfing candle patterns or anyother of your favorite price action triggers. If there are no price action triggers we can look to the firstindicator window and see if there is divergence. On the EurUsd 30 minute chart below we can see thatprice hit the same resistance point 3 times and on the third time it dropped like a rock on the heels of abearish engulfing candle pattern as well as divergence on the CCI. Price made a valiant attempt atreaching the same level as it did before missing it by 7 pips. This can be considered a double top. The CCIhowever just didn’t have the steam to reach the same previous high. This is an exaggerated form of regular bearish divergence.

Once we get the bearish engulfing candle pattern we can see that the divergence on the CCI is

confirmed as it crosses down the 5 smoothed moving average. We can then target the pivot level or thenext support level which in this case was S1. As you can see price made a very strong move down to S2but didn’t quite make it. However, this trade still played out very well. As you can also see from thisimage S2 was a very strong level of support as price touched it once the day before and bounceddramatically.

Setup: Uptrends

The same way we identified the down trend on the 4h from the above example is the same way we’ll doit for uptrends. First we’ll look at the 4h chart and see where the 5 smoothed high/low bands are inrelation to the middle Bollinger Band on the main chart. On the 4h UsdCad chart below we can see thatthe high/low bands are well above the middle Bollinger Band and have been for quite some timeindicating a strong up trend. Next we’ll take note of where price is in relation to our pivot levels. In thiscase price is near S1 on the previous candle, which is a doji, as well as near the bottom high/low band andvery close to the middle Bollinger Band. This is indicating a strong level of dynamic support. Next we’lltake a look at the CCI for any divergence and will take note that the market is making higher lows whilethe CCI is making lower lows. This is how we define hidden bullish divergence.

Since we’ve defined the trend as being up on the 4h chart and that price is near substantial support along with hidden bullish divergence we have strong reasons to believe that the 30 minute chart holds the key for entering a nice buy trade. On the 30 minute chart below we can see that price bounced off the S2 pivot level and got stuck between it and the S1 pivot level. Once S1 was broken, price subsequently broke above the high/low bands and the CCI had already began moving up above the 5 smoothed moving average and was on its way to break the middle Bollinger Band in indicator window 1. Once this took place price broke outside of its short range and we can enter the market with a stopbelow the previous candle as this provided a very tight swing. Our target could have been the pivot levelor R1, both of which were easily hit. It is important to note that we had plenty of volume at this time as well since this trade occurred during a very active portion of the market.

Trading Rules

Sell

1. Go at the 4 hour chart. If the Simple Moving Average is below the Middle Bollinger Band,

the market(Currency pair) is in a down trend.

2. After, go to the 30 minute chart and wait for price go approach a Resistance zone.

3. Check If there are patterns for trade and if there is divergence present

between price and the Indicators CCI/BB/SMMA .

4. If either of the above criteria are met, check that there is high volume, that the Volume bar is forming significantly higher.

5. when these conditions are met, enter a buy order with the candlestick pattern or bearish divergence pattern has completed.

6. Place initial stop loss above the most recent swing high.

7. Move your stop loss using the Simple moving average channel or middle Bollinger Band.

Buy

1. Go at the 4 hour chart. If the Simple Moving Average is above the Middle Bollinger Band,

the market(Currency pair) is in a up trend.

2. After, go to the 30 minute chart and wait for price go approach a support zone.

3. Check If there are patterns for trade and if there is bullish divergence present between price and the Indicators CCI/BB/SMMA .

4. If either of the above criteria are met, check that there is high volume, that the Volume bar is forming significantly higher.

5. When these conditions are met, enter a sell order with the candlestick pattern or divergence pattern has completed.

6. Place initial stop loss above the most recent swing low.

7. Move your stop loss using the Simple moving average channel or middle Bollinger Band.  

Below the link for donwload the Reversal Divergence Strategy with Bollinger Bands and CCI MT4 Template.

https://drive.google.com/file/d/0Bwjv2Pbf48itcFlMLTJPaU1SNGs/view?usp=sharing