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Trend Reversal Strategy
trend reversal is a powerful strategy to detect trend changes. You can find money-making trading opportunities that evade most traders. We use two forex reversal indicators to develop this reversal trading strategy:
The obvious tool
indicator used to determine the directional signal.
Both of these forex reversal indicators will protect you from false reversal signals. As we already mentioned we use the trend reversal trading strategy in combination with the price. The secret to trading trend reversal like a professional trader is to combine the price with other technical tools.
That’s exactly what we try to accomplish here. As this will help you spot high probability and reversal signals.
Now you’re wondering:
“How do I combine all these pieces together to actually identify trend reversal trading setups that work?”
Knowing what indicators to use and what is the Best Combination of Technical Indicators can dramatically improve your chart reading skills. If you use the wrong technical indicators, this can lead to inaccurate price interpretation and subsequently to bad trading decisions.
The trend reversal strategy can be broken down into a three-step process:
Identify the reversal bulge on the indicator.
Identify the prevailing trend prior to the reversal bulge.
Use the indicator to generate a directional signal.
Here is how to actually do it:
Step #1 Identify the Prevailing Trend
Always zoom out to have a clear picture of what is the prevailing trend.
The previous GBP?USD chart zoomed out revealed that the prevailing trend is .
Naturally, we assume that a reversal signal will follow. The trading bias is upwards once we correlated the reading with the price action.
Generally, we also want to confirm that the price is expanding and that we’re indeed in the last stage of a trend. This information is revealed in the price chart. We simply compare the most recent bars with the previous ones.
Are the expanding?
If yes, that’s what we need to see.
The bigger the candles are, the higher the change that a bigger trend reversal is going to develop.
Step #2 Identify the reversal Bulge
The reversal bulge was already revealed at the beginning of this trend reversal guide.
The must first go above the 27 level and then it needs to be followed by a drop back below the 26.5 level.
There is a high degree that the market will reverse from here.
That’s pretty much it. There is nothing we can add here as everything else comes down to the relationship between the price and the reading.
So far, so good.
Huston, we have a problem.
The indicator is prone to also produce large moves by the time the line it takes to drop back below the 26.5 level. This can create the false illusion of a trend. But, in reality this can be a simple trend pullback.
We’re going to teach you another great trick to use to capture trend retracements and pullbacks using the .
Let me explain…
A picture is worth a thousand words.
In this case, we’re effectively trend trading.
See below the last step before pulling the trigger:
Step #3 Use the for Trigger
We have established our trading bias and we have a reversal signal.
Next, is to wait for the indicator to provide us with a signal to trigger our long trade.
The classical crossover is the most popular crossover trade signal. The crossover occurs right after the dropped below the 26.5 level.
This is our signal that the momentum has shifted to the upside and the trend is ready to reverse.
So, you can go ahead and deploy your soldiers aka the money to capture more soldiers.
There are always going to be pros and cons between reversal trading vs. trend trading.
But what type of trader should you become?
Should you be a Reversal Trader or Trend Trader?
Each trading style has its own merits and proper use. While trend trading gives you the advantage of trading in the direction of the prevailing momentum, reversal trading gives you the advantage to buy low, sell high. But, if you don’t know what is your trading style, the chance of succeeding as a reversal trader or as a trend trader is very slim.
If you’re searching for a trend following strategy that will turn your trading around make sure you check the Trend Following Strategy.
You need to develop your strategy to accommodate reversal trading if you want to catch tops and bottoms. There is no right or wrong between trend trading vs. reversal trading.
The short answer is that you should be trading in a way to fit your own personality.
While the trend is your friend, not many have the discipline to stay in a trade riding a trend. The fact is reversal trading can be a quick way to make some profits. The advantage of reversal trading is that you can be in and out of the trade very fast.
Learn more about how to identify a Forex trend: Identifying Trends through Synchronization.
Final Words – Chart
The indicator allows traders to predict trend reversals that other technical indicators may fail to notice. Using the reversal bulge you can catch market tops and bottoms with deadly accuracy. You don’t have to be scared to try catching a falling knife. Most prominent hedge fund managers engage in reversal trading because it provides trade setups with high risk to reward ratios.
You can always keep a chart on the sideline to check if your favorite market is about to end a big trend cycle. The secret to trading trend reversal like a pro is to simply stop being scared of engaging in this type of trade activity. Just make sure you use wise risk management strategies before you put at work your hard-earned money.
PM me if you want the link to the actual complete strategy
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