One of the biggest problems of the original HLHB system was that its trade signals were too few. The Stochastic and also prevented me from getting into a lot of trades. So, with a little bit of research and School of Pipsology review, I have found two indicators that could replace the Stochastic.
The first one is the Relative Strength Index (RSI). According to the School of Pipsology, the RSI can be used to determine the trend. If the RSI is above 50, then it is likely that the price is on an uptrend. On the other hand, if the RSI is below 50, then price is probably on a downtrend.
The second one, the Average Directional Index (ADX), complements the RSI perfectly as it measures the strength of a trend. If the ADX is greater than 20, it will confirm the reversal and the strength of the trend.
The setting for both indicators is 12.
The new entry rules are as follows:
- Long: If there is an upward crossover, enter two positions at the open of the next candle if the RSI > 50 and the ADX is > 20.
- Short: If there is a downward crossover, enter two positions at the open of the next candle if RSI < 50 and the ADX is > 20.
I will keep the exit rules the same. I will place the stop of the two open positions above/below the high/low of the candle BEFORE the crossover candle by 10 pips. The first position will have a 150-pip profit target. The second position has no set profit target but will have a 150-pip trailing stop IF the first position hits its profit target.
Now let’s take a look at a few setups, shall we?
The first crossover was a valid signal to go long. As you can see, the upward EMA crossover which hinted an uptrend was confirmed by the RSI being above 50 and ADX which was over 20. However, the second crossover was a no go. Although the EMAs crossed and RSI was below 50, the ADX wasn’t above 20.
Last week we saw another buy signal when the signals lined up (EMA crossover, RSI above 50, and ADX above 20).
Going long at the open of the crossover candle at 1.4145, stop 10 pips below the low of the candle prior to the crossover at 1.4058 (it’s smaller than using a 150-pip stop), I would’ve taken profit on half of my position at 1.4295.
According to my HLHB rules, my stop would’ve been moved to breakeven and I would’ve closed the remainder of my position at 1.4376 with a 231-pip win!
Selling the pair yesterday at 1.4376 with a tight stop at 1.4386 would’ve been a valid trade too. Will it be another winner? Let’s see how it works out!
Okay, so what do you think of using the RSI and ADX? Be sure to let me know what your thoughts are through Twitter (@LoonieAdventure), Facebook, Google+, or by writing your suggestions in the comment box below. I’ll be back-testing and forward-testing my new system over the next month on demo, so wish me luck!