Stix Indicator Strategy For MT4
This strategy describes the Stix Indicator’s use in trading overbought and oversold market conditions. The STIX indicator is a momentum indicator for short term trading of market extreme areas. The indicator works by comparing the volume flow into advancing and declining stocks. In other words, it not only detects the overbought and oversold market areas, but also gauges the volume of trades on the buying and selling side of the market.
Indicator Used and Time Frames
The only indicator used in this strategy is the STIX indicator. The STIX indicator is created by combining the 21-period (i.e. 9%) exponential moving average of the above accumulation-distribution ratio (A/D ratio).
The vertical range of the STIX indicator falls between 0 and 100. The market extreme areas of the indicator are at 30 and below (for the oversold area) and at 70 and above for overbought areas.
If the STIX indicator gets as low as 30, the market is considered as being overbought and this is almost always a buy signal trigger, except for times when the market is very unstable or is in a very forceful bear market.
If the STIX indicator shoots up to 70 and above, this is a sell entry signal and should be used to initiate short orders. Those with trading experience using the STIX indicator have indicated that the indicator line does not get very oversold or very overbought, so the rules may have to be tweaked a little to get the best fit. In our own case, we have decided to use a situation where there is a failure swing, which is a situation of progressively higher troughs in the oversold area, or progressively lower peaks in the overbought area, as the triggers for trades.
The strategy can be used for any time frame. Use the time frame that suits you best after you must have tested the strategy on various time frames ranging from the 15-minute chart to the daily chart.
As indicated, the strategy that will be used is the failure swing strategy in the market extreme regions of the indicator's window. The reason why it is used is that the conventional method of just buying or selling if the indicator shows an oversold or overbought signal does not work very well here. On several occasions, the indicator line will hardly get to the very oversold or overbought areas to generate such signals. So, what should be done is to use a situation where there are progressively higher troughs in the oversold region, or to use the successive lower peaks in the overbought area. These failure swing signals indicate that sellers are losing momentum (oversold), or that buying pressure is starting to fade (overbought).
Stix-indicator-1: Chart showing indicator setup
The trader can perform the actual entry using a valid trigger on the chart itself. This trigger could be in the form of a candlestick pattern or a chart pattern. The following is a description of how the "buy" and "sell" trade scenarios may turn out.
- Long entry
Here is how to trade this strategy if you are looking for a long trading opportunity.
- Watch to see when the STIX indicator has formed two troughs when the asset is trending downwards.
- Identify an area where there are two troughs in the indicator line, with one trough being higher than the other in the oversold area (note the values of the green lines marking the vertical reading of the troughs).
- Look for a trigger on the chart to initiate the trade. In this case, the bullish engulfing candle was the trigger to set up a long trade.
- Buy at the open of the candle that follows the candlestick setup.
Stix-Indicator-2: Long Trade Setup
Stop Loss and Take Profit
Ensure the stop loss and take profit settings match the recommended risk-reward ratio of 1:3. This is the basic requirement. Then you can set the stop loss below the lowest point of the previous 5 candles that precede the entry trigger. If it is a chart pattern, set the SL below the support line for the pattern.
The Take Profit setting must be done in such a way that a previous resistance is used as the benchmark. Set the TP just below this previous resistance. However, you can protect any unrealized profits by using a trailing stop as the trade moves in your direction, or you can close half the position at profit and move the SL to the entry price to eliminate your risk.
- Short entry
What are the parameters that must be fulfilled for a short entry setup to be valid?
- Look out for when the STIX indicator has formed two peaks at a time that the asset is trending upwards.
- Identify an area where the indicator line has formed two peaks in a manner that the 2nd peak is lower than the first peak, and both peaks are in the overbought zone (i.e. 70 and above). Take note of the values of the green lines marking the vertical reading of the troughs).
- Look for a trigger on the chart to initiate the trade. In this case, the doji candle was the trigger to set up a long trade.
- Sell at the open of the candle that follows the candlestick setup.
This is what the setup looks like on the chart.
Stix-indicator-3: Short Trade Setup
We can see a situation where the price formed two peaks, with the second peak being lower than the first even though both peaks were technically in the overbought region.
Stop Loss and Take Profit Settings
As usual, you have to set the stop loss above the highest price of the 5 candles that precede the entry candle.
The Take Profit setting must be set using a previous support as the guiding light. In setting the TP and SL, you must ensure that you target to make a minimum of 3 pips in profit taken, for every 1 pip that is risked in the SL setting.
This strategy does not have a high success rate in terms of the number of winning trades to losing trades. Indeed, in your own backtests and forward tests on demo, you will find out that you will probably see more losing trades than winning trades. However, any winning trades are usually big winners. This is why it is very important to target a RRR of at least 1:3. If the reward targeted is higher, this is even better. The goal is to ensure that the number of pips won in all trades at the end of the month exceeds the number of pips lost. In 20 trades, you only need 8 winners with a RRR of at least 1:3 to be profitable. This is an important component of the strategy.
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