Trend Reversal Strategy Using DPO & EMA

Nail reversal trades with these 2 indicators (with example) →

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Today in less than 5 minutes:

1) A better strategy than following the trend
2) A not-so-common oscillator to catch reversals
3) How to trade reversals successfully using a 2-indicator strategy (with example)

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A better strategy than following the trend

All trading strategies revolve around one of the 2 principles:
- Riding the trend
- Anticipating a reversal

Riding the trend can give you good profits, but there's always a concern about it ending, especially if you didn't catch it early. On the flip side, reversal trades can bring good profits but are tricky to predict accurately since you're going against the market.

You can learn to analyze and profit from market cycles using the Elliott Wave principle, from a trader with 20+ years of experience.

But what if we could boost our accuracy in predicting reversals? Better probabilities and greater market movements!

Let's explore an indicator that can help us get better at predicting reversals.

A tried & tested oscillator to catch reversals

Anticipating reversals requires the estimation of peaks & troughs to identify buy & sell points in line with the historic cycle. And this can be done with the detrended price oscillator.

The detrended price oscillator (DPO) is calculated as follows:

Typically having a lookback period of 21 days, the DPO line is plotted below a stock chart, locating the most recent peaks/troughs and helping determine when the next one may occur. Estimated future peaks and troughs can be used as selling and buying opportunities respectively.

For example, if troughs have historically been about two months apart, one can locate the most recent trough and determine that the next one may occur in about two months.

Most traders find oscillators to be more useful in identifying signals for trend reversals than indicators. However, neither is inherently "better" at catching trends.

You can find this indicator in TradingView, and remember, we won't be messing with its settings or lookback period – just stick with the default setup.

By the way, you can learn to use TradingView in Naman Sharma’s How to Use TradingView course, where he will take you through a variety of indicators, tools, and features you can put to use to simplify your trading process. You can also use “STOCK10” for a 10% discount & get the course for just 359.

Let’s now combine the detrended price oscillator (DPO) with a classic EMA crossover for a brilliant market reversal strategy!

DPO + EMA Reversal Strategy

We will use the DPO to identify peaks and troughs, and profit from this analysis using a 9 & 21 period EMA crossover.

Useful for multiple timeframes, here’s how a trade can be initiated:

Entry / Long Trade

1) Look for areas in the chart where a stock’s price is making lower lows while the DPO is making higher lows.
2) Identify a positive EMA crossover, i.e., the 9-period EMA should cross above the 21-period EMA.
3) An entry / long trade can be made when a bullish candle occurs during or just after the crossover.

Exit / Short Trade

1) Look for areas in the chart where a stock’s price is making higher highs while the DPO is making lower highs.
2) Identify a negative EMA crossover, i.e., the 9-period EMA should cross below the 21-period EMA.
3) An exit / short trade can be made when a bearish candle occurs during or just after the crossover.

A bullish / bearish candlestick formation is a good confirmation to look for along with the above conditions being met.

Wondering if this strategy really works? Read on to see an example where it did!

Learn to use various indicators, oscillators, and techniques to identify and profit from market trends in Ms. Jyoti Budhia’s comprehensive Technical Analysis Course. Use STOCK10 for a 10% discount & get the course for just 359.

Below is the chart of TCS on a daily timeframe. You can see how its price formed lower lows while the DPO was making higher lows during the same period, helping us identify a trough.

A positive 9 & 21 EMA crossover after this triggered a long trade giving a ~15% return, until a negative crossover occurred.

TCS (1D)

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