The DPO (Detrended Price Oscillator) forex trend line strategy is an easy-to-use strategy that deploys the DetrendedPriceOscillator.ex4 indicator.
This indicator works primarily as an oscillator, gauging areas where the market is overbought or oversold.
As such, it can be used to trade based on extremes of price movement. However, we shall introduce an interesting way to trade this strategy in this article.
MetaTrader4 Indicators: DetrendedPriceOscillator.ex4 indicator (default setting); trend line tool (default settings).
Preferred Time Frame(s): 1-Hour, 4-Hours, 1-Day
Recommended Trading Sessions: This strategy can be used at anytime.
Currency Pairs: Any + Gold + Oil
DPO Long Trade Example (click the image for full size)
The DPO indicator has a line which transits from one price extreme to another. In doing so, it forms highs and lows of its own. We look for areas where a trend line can join the highs or lows of the DetrendedPriceOscillator.ex4 indicator, and where a corresponding trend line can join price highs and lows as well.
When the indicator line breaks the trend line, this can be used to trade as the price will also follow suit. Exits from trades are based on whether the indicator has crossed to the other price extreme.
Long Entry Rules:
A long position is initiated when the following indicator pattern is displayed on the chart:
- Connect the indicator highs with a trend line and repeat same for the price highs. Ideally, the indicator line must not have crossed the zero line to lie in positive territory.
- When the indicator line breaks the trend line, buy at the open of the next candle.
Stop Loss for Long Entry: ≥5-30 pips below the entry price.
Exit Strategy/Take Profit for Long Entry: Wait for the indicator line to cross to the overbought zone. This is where the trader should exit the trade. In other words, the TP is not set until the trade has reached a point where the currency pair is overbought.
Sell Entry Rules:
The conditions for initiating a short trade with this indicator are as follows:
- Check to see that the indicator line is in positive, overbought territory.
- Trace a trend line on the price lows at the overbought area, and also trace a trend line for the price lows.
- Where the indicator line breaks the trend line, initiate a short trade at the open of the next candle if this point is at the trend line, or allow the price to pull back up to the trend line a bit if the next candle’s open is too far away (as shown in the chart below).
Stop Loss for Sell Entry: Set the SL at a few pips above the trade entry.
Exit Strategy/Take Profit for Sell Entry: The profit area is in the oversold territory. Therefore, wait for DPO.ex4 indicator line to hit oversold territory before exiting the trade.
About The Trading Indicators
The Detrended Price Oscillator indicator is an indicator which can be used for price extreme trading, and can also be used in the manner shown in this article.