Octopus Alligator Momentum Forex Trading Strategy

Momentum trading is one of the more popular ways traders make money out of the forex market. This is for the simple reason that momentum trading works.

Momentum trading is simply a type of trading strategy wherein traders would take a trade in the direction of a strong momentum based on a technical analysis standpoint.

It works simply because trading in the direction of a strong momentum means you are trading with a strong flow of the market rather than against it. Momentum is simply a condition wherein a high volume of trades caused price to move strongly in one direction in a very short time. This often creates a candlestick pattern which is a long and full-bodied candle with small wicks.

Momentum trading is not only great because of its relatively better probability compared to other reversal setups. It is also great because of its tendency to be a catalyst for a fresh trend. Momentum price movements often cause many traders to jump into the action causing price to move strongly in one direction, which in turn could result in a trend. In these scenarios, traders who entered the market based on momentum could earn higher yields as the market would start to trend.

In this trading strategy, we will be looking at how a confluence of reversal signals coupled with momentum indications can result in a high yielding trend trade.

Alligator Indicator

Bill William’s Alligator indicator is a popular technical indicator which is based on a set of modified moving averages. It is a momentum indicator which can help traders identify the direction of the trend, the strengthening of a trend’s momentum, market contractions, as well as potential trend reversals.

This indicator is composed of three modified moving averages, particularly setup as Smoothed Moving Average (SMMA) lines. The blue line represents the longer-term moving average, the red line represents the mid-term moving average, while the lime line represents the short-term moving average. Being Smoothed Moving Average lines, these lines are, as the name suggests, characteristically very smooth, making it less susceptible to false signals.

Trend direction is based on how the moving average lines are stacked. The market is bullish if the lime line is on top and the blue line is on the bottom. If the lines are stacked inversely, then the market is bearish. Market expansions or the strengthening of a momentum is identified based on the widening of the gap between the moving average lines, while market contractions can be identified based on the contraction of these gaps. Trend reversals may also be identified based on the crossing over of the three moving average lines.

Octopus Indicator

The Octopus indicator is a momentum technical indicator which can help traders objectively identify the latest momentum direction.

This indicator is a binary type of indicator because it simply indicates whether the latest momentum shift is up or down. It plots a green bar on its own window whenever it detects a bullish momentum, and a red bar whenever it detects a bearish momentum. The color of the bars it plots only changes whenever it detects another momentum shift in the opposite direction.

Traders can use this indicator as a momentum direction filter in order to avoid trading against the flow of the market.

Signal Line

Signal Line, also known as oT S Ra Signal Line, is a custom trend-following indicator which is mainly focused on identifying the short-term trend direction or momentum.

This indicator is based on a modified moving average line. The moving average line it plots is characteristically very smooth, yet at the same time it is set at a low period count making it both smooth yet responsive. This makes the Signal Line an excellent moving average based short-term trend indicator.

The line it plots also change color depending on the direction of the short-term momentum. It plots a lime line whenever it detects a bullish short-term trend, and a red line whenever it detects a bearish short-term trend.

Trading Strategy

Octopus Alligator Momentum Forex Trading Strategy is a trend reversal strategy which incorporates momentum into its consideration of a valid trend reversal signal. It uses both candlestick pattern-based momentum indications and indicator-based momentum indications.

The trend reversal signal is based on the crossing over of the Alligator moving average lines and the Signal Line. The direction of the trend reversal is based on the direction of the crossover of the Alligator moving average lines while also incorporating the Signal Line as the shortest-term moving average line. On top of this, the color of the Signal Line should also confirm the direction of the short-term trend.

The Octopus indicator is used to confirm the latest momentum shift. Trades should be taken only when the trend reversal indicated by the moving average lines agree with the momentum indication from the Octopus indicator.

A momentum candle should also confirm the direction of the momentum reversal, which also doubles as the entry signal.

Indicators:

• Alligator
  • Jaws Period: 18
  • Teeth Period: 13
  • Lips Period: 10
• oT_S_Ra-Signal_Line
• Octopus_1

Preferred Time Frames: 30-minute, 1-hour, 4-hour and daily charts

Currency Pairs: FX majors, minors and crosses

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

• The Signal Line and the Alligator moving average lines should crossover in the following order:
  • Signal Line: top
  • Lime Line: second from the top
  • Red Line: second from the bottom
  • Blue Line: bottom
• The Signal Line should be lime.
• The Octopus indicator should plot green bars.
• Enter a buy order as soon as a bullish momentum candle is formed.

Stop Loss

• Set the stop loss on the support below the entry candle.

Exit

• Close the trade as soon as price closes below the blue line.
• Close the trade as soon as the Octopus indicator plots a red bar.

Sell Trade Setup

Entry

• The Signal Line and the Alligator moving average lines should crossover in the following order:
  • Signal Line: bottom
  • Lime Line: second from the bottom
  • Red Line: second from the top
  • Blue Line: top
• The Signal Line should be red.
• The Octopus indicator should plot red bars.
• Enter a sell order as soon as a bearish momentum candle is formed.

Stop Loss

• Set the stop loss on the resistance above the entry candle.

Exit

• Close the trade as soon as price closes above the blue line.
• Close the trade as soon as the Octopus indicator plots a green bar.

Conclusion

This trading strategy tends to work well in providing trend reversal setups that could result in an actual trend. This is because the trend reversals are confirmed based on the Octopus indicator and a momentum candle to have a strong momentum behind it.

The key to trading this strategy successfully is in finding strong momentum candles while avoiding momentum candles that could cause momentum traders to chase price as it has already moved too far. Traders who can find this balance consistently can make money from the forex market using this type of strategy.