Forex Spike Reversal Strategy

Spikes in the forex market are quite tempting to trade, but to be able to do so you’ll need to know what makes up a forex currency price spike.

Spikes are essentially steep, fast rallies witnessed in currency price and are a direct result of very important fundamental event risk like the non-farm payrolls report (NFP).

We have designed the Forex Spike Reversal strategy to allow traders take advantage of these spikes.

Chart Setup

MetaTrader4 Indicators: EMA Crossover Signal.ex4 (Input Variable modified; FasterEMA=7, SlowerEMA=10), rsi_filter.ex4 (Input Variable modified; RSI_period=36, MA_Period=46)

Preferred Time Frame(s): 1-Minute, 5-Minute, 15-Minute

Recommended Trading Sessions: Any

Currency Pairs: Any pair

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Buy Trade Example

Fig. 1.0

Strategy

Long Entry Rules

Initiate a buy entry if the following indicator or chart pattern gets displayed:

  1. If the royal blue marker forms on the price spike candlestick (which represents the underlying activity for the Non-farm Payrolls release during the month of May), it signals an increasing bar size in relation to the trade volume.
  2. If a spring green upward pointing arrow of the EMA Crossover Signal custom indicator forms below the candlesticks as shown on Fig. 1.0, price is said to be pressured higher i.e. a signal to buy the designated pair.
  3. If the blue line of the rsi_filter.ex4 custom indicator crosses its red line above the 50 level and hovers above this level, the sentiment in the market is said to be bullish i.e. a buy signal.

Stop Loss for Buy Entry: Place stop loss 3 pips below support.

Exit Strategy/Take Profit for Buy Entry

Exit or take profit if the following holds sway:

  1. If a red downward pointing arrow of the EMA Crossover Signal custom indicator aligns above price bars during a bullish signal, an exit or take profit is advised.
  2. If the blue line of the rsi_filter.ex4 custom indicator breaks below the indicator’s red line, an exit or take profit is recommended.

Sell Entry Rules

Initiate a sell order if the following rules or conditions takes precedence:

  1. If the royal blue marker forms on the price spike candlestick (which represents the underlying activity for the Non-farm Payrolls release during the month of April), it signals an increasing bar size in relation to the trade volume.
  2. If a red downward pointing arrow of the EMA Crossover Signal custom indicator forms above the candlesticks as shown on Fig. 1.1, price is said to be pressured lower i.e. a signal to sell the designated FX pair.
  3. If the blue line of the rsi_filter.ex4 custom indicator crosses its red line below the 50 level and hovers below this level, the sentiment in the market is said to be bearish i.e. a sell signal.

Stop Loss for Sell Entry: Place stop loss 3 pips above resistance.

Exit Strategy/Take Profit for Sell Entry

Exit or take profit if the following holds sway:

  1. If a spring green upward pointing arrow of the EMA Crossover Signal custom indicator aligns below price bars during a bearish signal, an exit or take profit is advised.
  2. If the blue line of the rsi_filter.ex4 custom indicator breaks above the indicator’s red line, an exit or take profit is recommended.

Sell Trade Example

Fig. 1.1

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About The Trading Indicators

The rsi_filter.ex4 indicator measures price changes over the past N periods (where N is the indicator’s input value).

It is a Relative Strength Index smoothed indicator that eliminates false signals that might be present on the normal RSI indicator.

EMA CROSSOVER SIGNAL indicator is a trend seeking indicator built on the crossover of two exponential moving averages. It will generate a signal when the fast and slow EMA crosses each other.

The volume_divergence_markets.ex4 custom indicator is deployed as a technical tool that places a marker on the activity chart in relation to the divergence between the bar sizes and trade volumes.