Counter trend trading from higher timeframe on British Pound nets fifty-one (51) pips of profit per contract. This strategy is pretty simple and requires the TradersHelpDesk ADX indicator to identify where retracements are likely to occur. Since the ADX is a non-directional indicator we simply look for areas where the ADX is either magenta and forms a magenta dot on the chart or for the ADX line to be above 70. If the ADX line is above 70 then we know the market is over-extended. By simply looking at the color of the line we can tell if the market is overbought (blue line) or oversold (red line).
Counter Trend Trading from Higher Timeframe on British Pound
As you can see from the chart below, the TradersHelpDesk ADX is above 70 and is red. This indicates that the market is oversold. One bar prior to the strategy generating the trade, the Directional Volume indicator shows there is a volume shift from selling to buying (order flow transition occurs as the sellers gave in to buyers). The blue on the red volume bar is the visual confirmation that identifies the shift. On the next bar, as the high of the previous bar is violated, the strategy generates the entry order at 1.4192. Since we know that we have fifty ticks of profit potential, we set the stop to twenty-five ticks from entry giving us a risk to reward ratio of 1 : 2. That is the minimum that we try to get on every trade.
By the end of the day our profit target has been achieved — fifty pips per contract or $312.50 since a pip is worth $6.25 on the British Pound currency futures by using the higher timeframe for entry.
The TradersHelpDesk ADX indicator is available for Multichart, TradeStation, and NinjaTrader.