basic principles of entry signals
TRANSCRIPT
EFC Indicator
This special indicator will help you trade the Forex Market by showing accurate reversal trade entries. It
uses rules based on RSI trading strategy which is described here https://tradingstrategyguides.com/rsi-
trading-strategy/
The EFC Indicator was created by Tradingstrategyguides.com special for those who like simple classic
and time-tested trading approaches. It shows the signals for making trades and, at the same time,
emulates a performing of trades ending them with SL, TP or signal's end. So, this indicator can show you
the whole trading process like a backtester.
The EFC indicators can be customized to your preferred settings. This indicator works the same way on
every time frame (M1-MN). It is recommended that you stick with the one time frame when you make a
trade that the indicator triggered on.
1 Basic principles of entry signals The EFC pattern starts when the RSI hits a critical level and the candles turn orange (default color).
Figure 1 – RSI enters oversold level (<20%). We’re looking for Buy opportunity
A note: to see arrows like in the picture enable an option: "Show markers with detail info" in chapter "3. Inputs"
Then when RSI gets back from the critical zone along with price, blue candles appear (default color). To
decide if a price is really tending to rise (for Buy pattern) we compare the current close price with a price
of the bar with the lowest RSI value (it must be higher). For the Sell pattern, accordingly, to be sure the
price goes down we compare the current price with the price of the bar with the highest RSI value.
Figure 2 – RSI gets back from the oversold level. At the same time, the price is rising as well
For setting an entry price we use the price of the bar where RSI pattern started. For Buy pattern we use
a bar's High, for Sell pattern – a bar's Low
Figure 3 – Setting an entry price for an order
When a BUY trade is triggered the remaining candles will turn green until the set stop loss or take profit
is reached. When a SELL trade is triggered the remaining candles will turn red until the set stop loss or
take profit is reached. You will also see a green arrow point up (for a buy) or a red arrow pointing down
(for sell).
Resuming everything written above we can outline the basic principles of getting Buy/Sell signals:
1. RSI must be in oversold (for buy signal) or overbought (for sell signal) zone (orange bars)
2. RSI must then exit that zone and go restoring along with a price (blue bars). Since this moment
we can put a stop order to enter a trade. Entry price is the start price of the pattern (first
orange bar)
3. As soon as a price triggers the entry level, the indicator emulates trade entry
4. If RSI turns back and goes again to over-zone, the signal cancels
Also, there is an alternative mode to form an entry signal. See the option: "Use entry RSI filter" in
chapter "3. Inputs". When the option is enabled, an entry stop order is postponed until the RSI recovers
to the specified levels. For example, for Buy pattern recovery level is 65% be default. Since the price may
overrun the RSI and come to an expected entry level before RSI gets a specified level, the entry order
may be executed by market price:
Figure 4 - Postponed Buy stop order and finally bying by market
2 Trading emulation After the trade is open there are 3 scenarios to exit the trade:
1. Exit by stop loss
2. Exit by take profit
3. Exit by opposite signal
There are 3 possible exits in pictures:
Figure 5 - Exit Buy trade by stop loss
Note: Stop loss is depicted as pink dots that start and end along with open position.
Figure 6 - Exit Buy trade by take profit
Figure 7 - Exit from Sell trade by opposite Buy trade
Stop loss can be calculated in several ways:
1. From the RSI pattern configuration
2. From constant values specified in settings
3. From the ATR indicator
2.1 Stop loss calculation from RSI pattern Let's consider the RSI pattern stop loss. In this mode, stop loss for Buy signal is taken from the lowest
price during RSI oversold zone (orange bars) or the first blue bar:
Figure 8 - Calculating the lowest price for the Buy stop loss
For Sell signal, accordingly, the highest price is taken.
Also, there is an option " Widen stop loss by min/max price" (see the chapter "3. Inputs") for making
stop loss wider. When it is enabled, the min/max of the price is searched through all orange and blue
bars:
Figure 9 – Widened Buy stop loss
Additionally, there is an option "Margin, points " (see the chapter "3. Inputs") to shift the level for a
specified number of points along or opposite the trade direction. This option allows making the stop loss
wider (positive values) or narrower (negative values) manually. As an example let's consider the same
trade from "Figure 8 - Calculating the lowest price for the Buy stop loss" and "Figure 9 – Widened Buy
stop loss" and make the stop loss wider for some points:
Figure 10 - Manually widened stop loss for Buy position
Also, there are 2 additional settings to make stop loss not less than some threshold:
Minimal stop loss: ATR period
Minimal stop loss: ATR multiplier
Supposing there may be situations when a calculated stop loss is too short (it may happen if all
lows/highs are not big enough relative to the RSI pattern start price) this setting will protect the trade
against a quick abort.
2.2 Constant stop loss This mode of stop loss calculation is quite simple: the value is set in settings. This mode allows a trader
to choose exactly the stop loss height he likes. But be cautious while using this mode: each instrument
requires a personal stop loss calculation because stop loss value depends on many factors: volatility,
liquidity, trade sessions, spread, and other trading conditions.
2.3 ATR-based stop loss This mode is a kind of automatization for "2.2. Constant stop loss". Like constant stop loss, this mode is
intended to give a trader opportunity to set up the stop loss value, but unlike a constat stop loss, the
value is set in relative to the volatility ATR coefficient.
2.4 Take profit calculation Take profit is calculated from stop loss value according to risk:reward ratio. By default the ratio is 1:2
which means take profit is twice bigger than stop loss:
3 Inputs
Signal parameters Range of scanning, bars: Since the indicator works in real-time mode and helps to
analyze current situation, it needs some history to look in to find RSI pattern. Usually, range about 50-100 bars is completely enough to detect a trade pattern.
RSI Period: Period of standard RSI indicator, which is used for pattern recognition RSI Applied price: Price to which RSI indicator is applied. Overbought/oversold levels: By default, 80/20 values are used to detect
when market reaches the reversal point. You can tighten the conditions and vice versa to mitigate them if you think the market needs it.
Use entry RSI filter. On/Off setting to enable/disable an advanced mode of filtering entry signal.
RSI threshold value for Buy. The RSI value which must be achieved to allow Buy entry. By default, it is 65. It means that RSI must first dip under level 20 (see above) and then return to 65 to make Buy signal possible. Pay attention that this threshold cannot be higher than the overbought level (80), otherwise, entry conditions will be never met.
RSI threshold value for Sell. The RSI value which must be achieved to allow Sell entry. By default, it is 35.
Trade simulation settings Ignore open signal if current position is already open: when checked any new entry
signal is ignored until current open position closes Ignore re-entry signals if position was closed by SL/TP: when checked multiple entries on
the same RSI pattern are ignored. For example, if position was open and then closed by SL/TP, but RSI pattern still continues, and new entry signals are possible, but with this option enabled, all new entry signals will be ignored
Stop loss calculation mode. The choice of:
i. High/low of RSI pattern ii. Calculate in points
iii. Calculate in ATR
See also a detailed explanation in chapter "2. Trading emulation"
Stop loss from high/low of RSI pattern settings
Widen stop loss by min/max price: When enabled, the stop loss is calculated
from all high/low orange and blue bars.
Margin, points: Allows to enlarge or reduce the stop loss manually for specified
number of points. As it was described in chapter "2.1. Stop loss calculation from
RSI pattern" a stop loss level is calculated by using the lowest colored
candle (BUY trade) or highest colored candle (SELL trade) in the pattern. By
default, it is placed right on the high/low value. But you can adjust it, moving
the SL farther or nearer with this parameter
Minimal stop loss: ATR period, Minimal stop loss: ATR multiplier. These
parameters define ATR parameters for the minimal possible stop loss value
calculation
Stop loss in points settings
Points: a number of points to define constant stop loss
Stop loss in ATR settings
ATR period: the period of ATR indicator. Default value is 14
ATR multiplier: the number to multiply a calculated ATR value. It is 2.0 by default
Trailing stop, points: when is set allows to apply a trailing stop practice – moving a stop
farther as price goes on in right direction. Bt default is 0 which means disabled
Risk:Reward (1:X): Take profit is calculated automatically by stop loss distance and by this ratio. Let’s say, if your Risk:Reward ratio is 1:3 and your stop loss is 100 points, your take profit will be 100*3=300 points. Changing this parameter you can vary how many profit you’re going to have from each trade
Drawing settings Draw mode: After trade signal generation EFC indicator follows an imaginary trade
until take profit/stop loss is hit or new signal is generated. To visualize we’re in trade we can use several drawing styles
Colored bars (red for short position, green for long position) from low to high.
Colored bars from open to close
Bricks above/below candle Candle width: By default bars involved into trade are painted atop of chart bars/candles
with the same width, but you can change their width if you’re willing to Show markers with detail info: when enabled shows a special markers on the chart to
indicate each event: pattern start, end etc. Lookback line/Buy signal/Sell signal/Stop loss/Take profit colors and styles: Each type of
drawings indicator can be adjusted to color the level as you like. Font name, Font size: is used to write a level values Autoscale chart to make lines always visible: when enabled it makes the chart autoscale
itself in the manner to make visible all drawn levels Notifications
Mode: there are possible values:
i. None ii. Show popup alerts
iii. Send push notifications iv. Both
Alert on setting entry stop order: if enabled, alert/notification will be fired each time the new level of entry order is defined
Alert on entry stop order triggered: if enabled, alert/notification will be fired each time the simulated order is filled (as if)
Alert on take profit triggered: if enabled, alert/notification will be fired each time the simulated order is closed by take profit (as if)
Alert on stop loss triggered if enabled, alert/notification will be fired each time the simulated order is closed by stop loss (as if)
4 Plots There are configurable plots for MetaTrader 5:
Figure 11 - Plots for MetaTarder 5
Buy and Sell entry levels define the colors of a line of entry price. Actually, this line can be interpreted as
a stop entry order:
Figure 12 – An example of Buy entry level
Yet not confirmed entry levels are used in "Use entry RSI filter" mode to show the entry price which is
determined but not confirmed yet by the RSI filter:
Figure 13 – Not confirmed entry Buy level example
Buy/Sell trade signal plots show the arrow in the place where the entry order should be filled. Buy/Sell
position entry price plots show the entry price after a position is open (actually, it is the same as Buy/Sell
entry level, but after the entry happens). Buy/Sell stop loss level and Buy/Sell take profit level plots
show the levels of stop loss and take profit. All these trading plots are shown in the picture below:
Figure 14 – Trade plots in action
Candle type plot defines 4 colors for drawing candles: Overbought/oversold zone (orange), start of stop
order (blue), in position (green or red).
For MetaTrader 4, due to different platform abilities, a set of plots for drawing candles is slightly
different. Also, MetaTrader 4 does not show plot names (it shows plot indexes instead). To solve the
issue and understand what is what we recommend to use plot settings dialog along with Data Window:
Enjoy trading with our indicator!
Sincerely yours, www.tradingstrategyguides.com team