How to Identify Reversals
How to Identify Reversals – FxPremiere Group explanations on Reversal Strategies.
Method 1: Fibonacci Retracement
A popular way on how to identify reversals retracements is to use Fibonacci levels.How to Identify Reversals.
For the most part, price retracements hang around the 38.3%, 50.1% and 61.7% Fibonacci retracement levels before continuing the overall trend.
If price goes beyond these levels, it may signal that a reversal is happening. Notice how we didn’t say will.
As you may have figured out by now, technical analysis isn’t an exact science, especially in forex markets.
In this case, price took a breather and rested at the 61.7% Fibonacci retracement level before resuming the uptrend.
After a while, it pulled back again and settled at the 50.2% retracement level before heading higher |How to Identify Reversals.
Method 2: Pivot Points
Price reversal is staging a reversal is to use pivot points.
In an UPTREND, traders will look at the lower support points (S1, S2, S3) and wait for it to break.
In a DOWNTREND, forex traders will look at the higher resistance points (R1, R2, R3) and wait for it to break.
Method 3: Trend Lines
The last method is to use trend lines. When a major trend line is broken, a reversal may be in effect.
By using this technical tool in conjunction with candlestick chart patterns discussed earlier,
The Shock Reversal
The second type of trend reversal we’re going to look at is the shock reversal.
The shock reversal occurs when the reversal comes as a shock to the traders participating in the previous trend.
Usually in a shock reversal situation there will not be a previous consolidation present in the market, which means bank traders are unlikely to have been able to place a large number of trades in the direction of the reversal itself.
The Consolidation Reversal
We’ll start things off by looking at the consolidation trend reversal.
The consolidation reversal gets its name from the way the market consolidates before a trend reversal actually takes place.
The way they do this by taking partial profits, there would be no point in them placing buy trades because they are expecting a downtrend to take place
When the traders saw the market move up they assumed a bounce was taking place and started placing long positions with the expectation the market was going to move back to the upper boundary of the consolidation.
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Although the buying was small and no big pullback or consolidation took place, it’s still the first signal we have of retail traders beginning to go short in the market and we should be wary that the down-move could be coming to an end sooner rather than later.
Before the market enters a consolidation most of the traders in the market will be placing trades in the direction of the trend, when the consolidation begins some of these traders will close their trades while others will still hold on to their positions. As the market continues to consolidate over the coming weeks more and more of the trend traders will close their trades due to the trend not continuing and will revert to trying to capture the movement in the consolidation. How to Identify Reversals by FxPremiere Group.
The Deep Pullback Reversal
The deep pullback reversal is the final type of trend reversal we are going to take a look at, I’ve talked extensively over the last couple of weeks as to what information can be gained by studying deep pullbacks.
The whole point of the deep pullback reversal is to manipulate retail traders into believing the previous trend is going to continue so the bank traders can place more trades in the direction they want the market to reverse.
As the market came to a stop near the lows of the swing up and instead began to rise, all of the retail traders who had gone short started to close their short trades which injected a huge amount of buy orders into the market. The move up you see from the 76.4% fib level is for the most part fueled by the buy orders coming into the market from the short traders closing their losing short positions – How to Identify Reversals.
In any deep pullback you see the size of the movement created by the deep pullback reversal is dependent on how many traders were placing trades on the deep pullback itself, in the example above we had a massive amount of traders going short as they believed the downtrend was going to continue, when it failed to do so all these traders were forced to admit they were wrong by closing their trades which pushed the market against the downtrend and essentially created a new uptrend.
Trend Reversals And Time-Frames
The psychology of the traders in the market is the same regardless of what time-frame they operate on, if a set of traders on the 1 minute chart see the market move lower, then pullback and move lower again, they will place sell trades. The same as if a traders on the daily chart see’s the market drop and make a pullback before dropping again. The only difference between trend reversals on different time-frames is the number of traders the reversal is affecting.