Identifying market’s reversal

Identifying market’s reversal

A trader needs to know whether a Forex trend is close to reversal for 2 reasons. First, if we are already holding a position on a trend, you want to exit it before the trend’s reversal. Second, the reversal is a time when a new trend emerges providing an opportunity to join the trade early and gain more.

The probability of reversal largely depends on the strength of the current trend. There are several ways to estimate how strong a trend is, here are the 2 we recommend:

1. Visual analysis

Look at the highs and lows of a trend. If the corrections are short, and the consolidation develops in narrow ranges, the trend is strong. In a strong bullish trend, the price strictly respects the first support formed at the previous highs.

In case of a slow trend, the price falls below the previous high (the initial support) but holds above the previous low. A bullish signal in such trend can be used for opening long positions.

A weak trend can be recognized by a lower high. In this situation, traders will be afraid of the formation of the “Head and shoulders” pattern. Lower high during an uptrend hints at a potential reversal of the market.

Let's study an example. It's necessary to distinguish between support #1 (previous high during an uptrend) and support #2 (previous low during an uptrend). We talk about a reversal when the price breaks support #2.

2. Indicator analysis

ADX is a leading indicator of trend’s strength. The main line of the indicator rises when the trend is getting stronger. The ADX magnitude varies from 0 to 100. 25-50 range corresponds to a strong trend, 70-75 range – to a very strong trend, 75-100 –  an extremely strong trend. The type of the trend (ascending/descending) depends on the location of the auxiliary lines: + DMI is higher than -DMI during an uptrend; + DMI is lower than -DMI during a downtrend. The intersections of these 2 lines may provide entry signals.

The ADX drift above the 25 level can be used as a confirmation of the breakout and trend reversal. The divergence of ADX line and the price during an uptrend – lower highs of the indicator and higher highs on the technical chart – is not a signal for sales, but a signal for the reduction of the bullish position.

It’s very important for trend traders to know how to distinguish reversal from a mere correction. In the table below we have assembled the information that will help you do that. 

 

Correction/retracement

Reversal

What happens before?

Powerful movement of the price

Anything

What was the cause?

No causes

Fundamental factors

Market players

Retail traders take profit

Large speculators trade with high volumes

Chart patterns

 Few patterns (usually only candlestick patterns)

Reversal chart patterns

Timeframe

Short-term reversal which lasts no more than 1-2 weeks

Long-term reversal which lasts more than 2 weeks

Japanese candlesticks

Candles indicating uncertainty: with long upper and lower shadows (spinning tops)

Reversal candles – engulfing, hammers, shooting stars, etc.

Latest news

Techs push Wall Street up on trade optimism

On Wednesday, American equities rallied, backed by the technology sector due to the fact that signs that China would ease its "Made in China 2025" industrial policy contributed to optimism driven by US leader’s positive remarks on trade…

American consumer prices stand still

In November, American consumer prices didn’t change, although held back by a steep dive in the price of gasoline…

Gold ascends to session maximums on US inflation data

On Wednesday, gold managed to leap reaching the best levels of the trading session because data disclosed that American consumer price surge speeded down in November…

Deposit with your local payment systems

Callback

A manager will call you shortly.

Change number

Your request is accepted.

A manager will call you shortly.

Internal error. Please try again later

Beginner Forex book

The most important things to start trading
Enter your e-mail, and we will send you a free Beginner Forex book

Thank you!

We've emailed a special link to your e-mail.
Click the link to confirm your address and get Beginner Forex book for free.

You are using an older version of your browser.

Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Safari Chrome Firefox Opera