Welcome to "The Divergent Reversals" trading strategy.

In this guide, we will explore a powerful approach that combines the potential of divergence trading with the robustness of the Money Flow Index (MFI) indicator. By understanding and implementing this strategy, you'll be equipped with a valuable tool to identify trend reversals and seize profitable trading opportunities.

Divergence trading is a technique that focuses on the relationship between price action and the oscillator. Within the realm of divergence trading, the Money Flow Index (MFI) stands out as a reliable indicator for evaluating the strength of buying and selling pressure in the market. By incorporating the MFI into our strategy, we can effectively validate trend reversals and time our entries and exits more accurately.

In addition, we plot a 12-period smoothed moving average with shift 5. This SMA will give us the trigger signals for a trend reversal. You will find that this 12-period SMA will often act as a support and resistance within a trend. Thus, we use it as an entry signal on a breakout.

Below, we show a chart of a bearish setup on the 4-hour timeframe of Brent oil.


As you can see, the parameters of the Divergent Reversals strategy accurately identified the new bearish swing down. The exit signal is generated when the price crosses the 12-period SMA again in the other direction.

The settings for the Money Flow Index are slightly changed for this strategy. Instead of the standard 14, we use a period of 30. This gives smoother movements on the indicator and more reliable divergence signals.

The 12-period SMA can also be used for the initial placement of the stop loss. The most recent swing high/low around the SMA can be used as a precise level.

Wrap up

The Money Flow Index (MFI) is a volume-based indicator that incorporates volume data into its calculations. As a result, it shines brightest when applied to assets that have volume data available, such as commodities or stocks. On the other hand, the Forex market lacks reliable volume data, which can limit the MFI's effectiveness (although you can still absolutely use it).

The Divergent Reversals strategy indicators:

    * 12-period smoothed moving average, shift 5 periods forward

    * MFI oscillator – period 30


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