Combination Reversal Strategy Based on Stochastic Turnaround Factor and Key Reversal Signal

Overview

This strategy combines the stochastic turnaround factor and key reversal signal, two types of reversal strategies, to obtain combined trading signals. It first uses the stochastic turnaround factor to determine whether the price shows signs of reversal. It then incorporates the key reversal signal to filter out false reversals and ensure the capture of true reversal opportunities, reducing trading risk.

Strategy Principle

Stochastic Turnaround Factor

This part comes from the reversal strategy introduced in Ulf Jensen’s book “How I Tripled My Money in the Futures Market”. It combines the reversal patterns of closing price and stochastic indicator to determine whether the price trend has reversed.

It goes long when the closing price is higher than the previous closing price for two consecutive days and the 9-day slow stochastic line is below 50. This indicates that the price has continued to rise in the short term, but the stochastic indicator shows that the stock is excessively bought, heralding a possible reversal decline.

It goes short when the closing price is lower than the previous closing price for two consecutive days and the 9-day fast stochastic line is above 50. This indicates that the price has continued to fall in the short term, but the stochastic indicator shows that the stock is excessively sold, heralding a possible reversal rally.

Key Reversal Signal

The key reversal signal refers to the K-line pattern where the price hits a new high or low during the day and then reverses markedly. It often signals a change in market trends.

In a bull market, after the price hits a new high, if the closing price is near the lowest price of the previous day, it constitutes a key reversal long signal. In a bear market, after the price hits a new low, if the closing price is near the highest price of the previous day, it constitutes a key reversal short signal.

Advantages of the Strategy

1. Combining multiple indicators and K-line patterns improves the accuracy of trading signals.

2. Built on reversal theory to capture potential reversal opportunities.

3. Judging trends and stochastic indicators at the same time can effectively filter out wrong signals.

4. Key reversal signals can avoid false reversals and reduce trading risks.

Risks and Optimization

1. When reversal patterns appear, the market may not have truly reversed, posing callback risks. Stop loss can be set to control risks.

2. Divergence may occur between the stochastic indicator and prices, resulting in wrong signals. The parameters of the stochastic indicator can be optimized or combined with other indicators for confirmation.

3. This strategy is mainly based on intraday and short-term trading and cannot cope with longer-term trending markets. Methods like trends and chart patterns can be incorporated to improve it further.

Conclusion

This strategy combines price action, stochastic indicator and key reversal signals to capture potential reversal opportunities. Compared to standalone reversal trading methods, it can more accurately determine the timing of reversals and filter out false signals. However, attention should still be paid to pullback risks after reversal and the divergence between stochastic and prices. More reliable trading strategies can be obtained through parameter optimization, stop loss setting and further integration with other strategies.