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Reversal patterns and technical indicators are two great tools for finding profitable trading opportunities. Combined, they unlock their full potential. This article explains how you can use technical indicators to make the most of your reversal pattern trading with binary options.
- What Are Reversal Patterns?
- Combining Reversal Patterns And Technical Indicators
- How To Trade Reversal Patterns
With this information, you will be able to use technical indicators to support your reversal pattern trading with binary options.
What Are Reversal Patterns?
As the name indicates, reversal patterns are significant price formations that indicate an impending market reversal. The right technical indicators can aid you in trading reversal patterns, unlocking many more trading opportunities for each reversal pattern and helping you to better trade the more well-known opportunities.
There are three main reversal patterns you have to know:
1. The Head And Shoulders Formation
The market is in a trend and reverses. The head and shoulder can both represent an ending uptrend and a beginning downtrend or an ending downtrend and a beginning uptrend. In the picture, you see the top reversal with an ending uptrend. For the bottom reversal, just flip the picture on its head.
2. The Triple Top And The Triple Bottom
The triple top or bottom is a head and shoulders formation with two shoulders that are closer to the extreme. In the picture, you see a triple bottom that indicates and ending downtrend and a beginning uptrend. The triple top is the same thing flipped on the head.
3. The Double Top And The Double Bottom
The double bottom and the double top look very similar to the triple bottom and the triple top. The main difference is that the market forms only two bottoms/tops, and reverses only once between those bottoms.
The beginning of the double top/bottom is the same as with the triple formations. The market creates an extreme and reverses briefly. After that, the patterns are slightly different.
- In a double top/bottom, the market takes longer to form the second bottom. The movement there is erratic and often shows a significantly lower volume. You can see this difference in the picture, where the market seems to stutter its way to the second bottom.
- In a triple top/bottom, the movement to the second extreme is straighter. While its volume is already lower than during the preceding trend, it is higher than in a double formation.
Often, the movement to the second extreme helps you distinguish between the double and the triple formations. We will soon analyse how technical indicators can help you with this important task.
The double formation completes when the market breaks through the price level of the previous reversal. At this point, a new trend will likely start in the direction of the preceding trend.
Combining Reversal Patterns With Technical Indicators
As you can see with the double formations and the triple formations, reversal patterns are often difficult to distinguish by pattern analysis alone. Only when they are complete, it is easy to see which reversal pattern you are dealing with. Technical indicators can help you to earlier recognize reversal patterns and more accurately define their boundaries
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Put yourself in the shoes of a reversal pattern trader. When you think that the market will reverse, there are still many questions to answer. Questions such as:
- Which reversal will the market form?
- Will the market reverse after two highs/lows or will it create three high/lows?
- Will the market form a large reversal pattern or will the pattern be smaller and quicker?
Answering these questions is essential to winning a trade.
- When you think that the market is forming a double bottom, but it is really forming a triple bottom, you might invest too early.
- When you think that the market is forming a triple bottom, but it is really forming a double bottom, you might invest too late.
- When you think that the market is forming a triple top, but it is really forming a head and shoulders top, you will make all sorts of wrong predictions.
Accurately assessing the current market environment is essential to making the right predictions. Technical indicators are the ideal tool for this job. They can do three things for you:
- Technical indicators can help you understand when reversal patterns will form. Leading technical indicators help you understand when a trend is running out of momentum. In these market environments, a reversal will happen soon, which is why you know that you have to search for a reversal pattern. When you see the first signs of a reversal pattern, you know what is going on and can make the right investment decisions. Without technical indicators, you would be late to the party and miss out on great trading opportunities while maybe making bad decisions.
- Technical indicators can help you to find more trading opportunities in a reversal pattern. Understanding reversal patterns will help you recognize the general pattern. But this rough outline is insufficient for making an actual trade. When you know that the market is going through a reversal pattern, technical indicators help you understand how long each movement in this pattern will last. Therefore, you can determine the reach of each swing and trade all kinds of binary options based on this indication.
- Technical indicators can help you understand which reversal pattern you are dealing with. When you understand how far a swing will reach and when it will turn around, you can more easily distinguish the different forms of reversal patterns. When the market is nearing its second high during a bottom reversal, technical indicators can predict whether it will turn around soon and form a triple pattern or continue to rise and form a double bottom. You know what to expect and you can make better trades.
Combined, these three advantages provide you with a much better understanding of reversal patterns. By adding technical indicators, you can significantly improve your accuracy, your timing, and the number of trading opportunities that you find.
These advantages are so significant that every trader should consider adding at least one technical indicator to their trading of reversal patterns. Let’s take a look at how you can do that and which technical indicators can help you in which ways.
How To Trade Reversal Patterns
At this point, it is time to get concrete. We will now outline a few strategies for how to combine reversal patterns and technical indicators. The important point of these strategies is to show you the possibilities and the tools you can use. You do not have to copy these strategies exactly as we present them. Feel free to adapt them to your personal preference or include parts of them in your current strategy.
With that being said, let’s get started.
Strategy 1: Combining Reversal Patterns With The Money Flow Index (MFI)
The first technical indicator that we want to recommend combining with reversal patterns is the Money Flow Index (MFI).
The MFI is simple to understand. It multiplies the price movement of each period with its volume and then compares the sum of periods with rising prices to the sum of periods with falling periods. It presents the result as a percentage value between 0 and 100.
- A value of 0 indicates that all the money has been flowing out of the asset.
- A value of 100 indicates that all the money has been flowing into the asset.
- A value of 66 indicates that two-thirds of the money has been flowing into the asset, and one-third out of it.
You can interpret the MFI in two ways:
- Extreme areas. The MFI has two extreme areas: values over are considered overbought, values under 30 are considered oversold. In both cases, the MFI predicts that the market will soon turn around.
- Failure swings. In an intact trend, the MFI mirrors the market’s movements. As an uptrend climbs higher and higher, the MFI should climb, too. As a downtrend falls lower and lower, the MFI should fall, too. A failure swing happens when the market creates a new extreme without the MFI creating a new extreme, too. This sign indicates that the current trend is running out of momentum and that a reversal will happen soon.
Both of the MFI’s indications are ideal for trading reversal patterns. Here is what you do:
- Wait for the MFI to indicate a reversal. Depending on your preference, you can use extreme areas or failure swings. We recommend waiting for the MFI to enter an extreme area and then start scanning the market for a reversal pattern. When you find a failure swing, there is a good chance that the reversal pattern has already begun.
- Find the reversal pattern. Once the MFI has indicated that the market will reverse soon, it is time to start searching for the reversal pattern. Use pattern analysis and focus on price action. As soon as you have identified the beginning reversal pattern, continue with the next step.
- Identify the reversal pattern. Additionally, use the MFI to identify weakening movements. Switch to a shorter chart period and try to understand when the movements in the longer chart period will end. This way, you can understand whether the pattern will end after two extremes or three swings. If the second retracement begins to weaken as it reaches the price level of the first reversal, you know that the market will likely turn around and create a pattern with three extremes. If the second reversal shows no signs of weakening, you are likely dealing with a double bottom or a double top.
- Trade the pattern itself. Once you have identified the reversal pattern, you can use the MFI to predict impending reversals and more accurately pinpoint the boundaries of the pattern. You know the rough estimate for how far each swing will move. Use the MFI to monitor the strength of the swings as you trade them. If a swing is still strong, predict that the swing will continue. If a swing is beginning to weaken, wait until it indicates a clear reversal, and then invest in the opposite direction. Knowing the strength of each single swing helps you trade binary options types with a higher payout, for example one touch options and ladder options.
- Trade the prediction of the pattern. Once the pattern is complete, you can invest in the new trend that just started. You can use the MFI to confirm this trend. When the reversal pattern completes, the MFI should show no indication of a weakening trend. If the MFI still has enough room to rise and has not yet created a failure swing, predict that the new trend will continue. The exact details of the MFI can help you understand the strength of the current trend and whether you can trade it with a binary options type with high payouts or should play it safe and use high/low options.
In short, you can use the MFI to confirm and evaluate every part of the reversal pattern. You start by finding the market environments in which reversal patterns develop. You continue by using the MFI to time your investments, and you finish by using the MFI to confirm the reversal pattern’s main prediction.
Strategy 2: Combining Reversal Patterns With Moving Averages
The second technical indicator that can help you make the most of reversal patterns is the moving average.
Moving averages calculate the average price of the last periods and draw it into your price chart. For example, when you use a 20-period moving average, the moving average calculates the average price of the last 20 periods and draws it into your chart.
After that, the moving average goes back one period and repeats the process from the perspective of this period. This way, the moving average works its way through your price chart, always calculating the average price for the last 20 periods from the vantage point of each period.
The result of this process is a line. This line can tell you a lot about the market:
- Directionof the moving average line. If the moving average is pointing upwards, the market must be rising. If the moving average is pointing downwards, the market must be falling. When the moving average changes direction, it indicates a change in market sentiment.
- Linein relation to the current market price. If the market is above the moving average, it must have gained upwards momentum in the recent past. If the market is below the moving average, it must have lost momentum. When the market breaks through the moving average, it indicates a changing market environment.
- The moving average as a resistance/support line. The market is always reluctant to break through a moving average. When the market is above the moving average, the moving average works as a support; when the market is below the moving average, the moving average works as a resistance.
These indications are especially strong with significant moving averages. Most traders use moving averages based on 5, 10, 20, 50, 100, or 200 periods, which is why these values work best for a moving average strategy.
Additionally, longer moving averages are more significant than shorter ones. The market will be very reluctant to break through a moving average based on 200 periods, but it will break through a 5-period moving average more willingly.
Similar to moving averages, many other price formations create resistance and support level. You can combine them in a similar way with moving averages.
Strategy 3: Combining Reversal Patterns With Bollinger Bands
Bollinger Bands are a technical indicator that is very similar to moving averages.
The basis of Bollinger bands is a moving average with 20 periods. This moving average creates the middle line of the Bollinger. It is surrounded by an upper and a lower line that are the results of adding and subtracting twice the value of the standard deviation.
Bollinger bands create three lines that surround the market. The upper and the lower line create boundaries which the market is highly unlikely to leave, the middle line works as an additional resistance or support line, depending on whether the market is trading above or below the line.
When you expect that the market is forming a reversal pattern, Bollinger bands can give you a good idea of the rough outline of the pattern.
For example, that the market was in an uptrend that you expect to end. Here’s what you do:
- Use Bollinger bands to identify market environments in which reversal patterns are likely to form. Switch to a time frame that is longer than the time frame that you want to trade. For example, if you want to trade a chart period of 5 minutes, it would make sense to switch to a 1-hour chart. Wait until the market nears the upper range of the Bollinger bands or approaches the middle Bollinger band from below. In both cases, the market is likely to reverse, which, in turn, is likely to create a reversal pattern on a shorter chart period. Once you have found the situation, switch to the shorter chart period.
- Wait until the market trades at the upper range of the Bollinger bands on the shorter period. For an uptrend to have enough room to create a reversal pattern, it has to trade at the upper range of the Bollinger bands. Wait until the market gets there. On the way, you might be able to trade a few binary options that predict this movement, including some that make use of the Bollinger Band’s clear price target to trade an option type with a higher payout such as one touch options.
- Use the Bollinger bands clear price targets to make additional trades. When you know that the market will reverse, you need to predict how far each swing in the reversal pattern can reach. Bollinger bands provide you with clear indications for this task. The market can either reverse to the middle Bollinger band or the lower Bollinger band. The middle Bollinger band is the safer bet, but the lower band can also make sense as a price target if the trend created large reversals before. Use these targets to trade additional binary options.
The key to successfully executing this strategy is choosing the right chart period for your expiry. Bollinger bands change as the moving average and the standard deviation change, which is why you should trade them with an expiry that is close to the period of your chart.
For example, in a 5-minute chart, it would be a bad idea to trade Bollinger bands with an expiry of 2 hours. Until then, the market will have created so many new periods that the Bollinger bands will have changed completely. The predictions from two hours ago are now meaningless.
In this example, it would be better to use an expiry of 15 minutes.
Technical indicators can greatly benefit your trading of reversal patterns. They help you identify market environments in which reversal patterns are likely to form, identify the right reversal pattern, and find additional investment opportunities during the reversal pattern. Combined, these advantages are the reason why every binary options trader should consider adding at least one technical indicator to their reversal pattern strategy.
Market Reversals and How to Spot Them
Capturing trending movements in a stock or other type of asset can be lucrative. However, getting caught in a reversal is what most traders who pursue trendings stock fear. A reversal is anytime the trend direction of a stock or other type of asset changes. Being able to spot the potential of a reversal signals to a trader that they should consider exiting their trade when conditions no longer look favorable. Reversal signals can also be used to trigger new trades, since the reversal may cause a new trend to start.
In his book “The Logical Trader,” Mark Fisher discusses techniques for identifying potential market tops and bottoms. While Fisher’s techniques serve the same purpose as the head and shoulders or double top/bottom chart patterns discussed in Thomas Bulkowski’s seminal work “Encyclopedia of Chart Patterns,” Fisher’s methods provide signals sooner, giving investors an early warning of possible changes in the direction of the current trend.
One technique that Fisher discusses is called the “sushi roll.” While it has nothing to do with food, it was conceived over lunch where a number of traders were discussing market setups.
- The “sushi roll” is a technical pattern that can be used as an early warning system to identify potential changes in the market direction of a stock.
- When the sushi roll pattern emerges in a downtrend, it alerts traders to a potential opportunity to buy a short position, or get out of a short position.
- When the sushi roll pattern emerges in an uptrend, it alerts traders to a potential opportunity to sell a long position, or buy a short position.
- A test was conducted using the sushi roll reversal method versus a traditional buy-and-hold strategy in executing trades on the Nasdaq Composite during a 14-year period; sushi roll reversal method returns were 29.31%, while buy-and-hold only returned 10.66%.
Sushi Roll Reversal Pattern
Fisher defines the sushi roll reversal pattern as a period of 10 bars where the first five (inside bars) are confined within a narrow range of highs and lows and the second five (outside bars) engulf the first five with both a higher high and lower low. The pattern is similar to a bearish or bullish engulfing pattern, except that instead of a pattern of two single bars, it is composed of multiple bars.
When the sushi roll pattern appears in a downtrend, it warns of a possible trend reversal, showing a potential opportunity to buy or exit a short position. If the sushi roll pattern occurs during an uptrend, the trader could sell a long position or possibly enter a short position.
While Fisher discusses five- or 10-bar patterns, neither the number or the duration of bars is set in stone. The trick is to identify a pattern consisting of the number of both inside and outside bars that are the best fit, given the chosen stock or commodity, and using a time frame that matches the overall desired time in the trade.
The second trend reversal pattern that Fisher explains is recommended for the longer-term trader and is called the outside reversal week. It is similar to a sushi roll except that it uses daily data starting on a Monday and ending on a Friday. The pattern takes a total of 10 days and occurs when a five-day trading inside week is immediately followed by an outside or engulfing week with a higher high and lower low.
Testing the Sushi Roll Reversal
A test was conducted on the NASDAQ Composite Index to see if the sushi roll pattern could have helped identify turning points over a 14-year period between 1990 and 2004. In the doubling of the period of the outside reversal week to two 10-daily bar sequences, signals were less frequent but proved more reliable. Constructing the chart consisted of using two trading weeks back-to-back, so that the pattern started on a Monday and took an average of four weeks to complete. This pattern was deemed the rolling inside/outside reversal (RIOR).
Every two week section of the pattern (two bars on a weekly chart, which is equivalent to 10 trading days) is outlined by a rectangle. The magenta trendlines show the dominant trend. The pattern often acts as a good confirmation that the trend has changed and will be followed shortly after by a trend line break.
Once the pattern forms, a stop loss can be placed above the pattern for short trades, or below the pattern for long trades.
The test was conducted based on how the rolling inside/outside reversal (RIOR) to enter and exit long positions would have performed, compared to an investor using a buy-and-hold strategy. Even though the NASDAQ composite topped out at 5132 in March 2000 (due to the nearly 80% correction that followed), buying on January 2, 1990 and holding until the end of the test period on January 30, 2004 would still have earned the buy-and-hold investor 1585 points over 3,567 trading days (14.1 years). The investor would have earned an average annual return of 10.66%.
The trader who entered a long position on the open of the day following a RIOR buy signal (day 21 of the pattern) and who sold at the open on the day following a sell signal, would have entered their first trade on January 29, 1991, and exited the last trade on January 30, 2004 (with the termination of the test). This trader would have made a total of 11 trades and been in the market for 1,977 trading days (7.9 years) or 55.4% of the time. However, this trader would have done substantially better, capturing a total of 3,531.94 points or 225% of the buy-and-hold strategy. When time in the market is considered, the RIOR trader’s annual return would have been 29.31%, not including the cost of commissions.
Using Weekly Data
The same test was conducted on the NASDAQ Composite Index using weekly data: using 10 weeks of data instead of the 10 days (or two weeks) used above. This time, the first or inside rectangle was set to 10 weeks, and the second or outside rectangle to eight weeks, because this combination was found to be better at generating sell signals than two five-week rectangles or two 10-week rectangles.
In total, five signals were generated and the profit was 2,923.77 points. The trader would have been in the market for 381 (7.3 years) of the total 713.4 weeks (14.1 years), or 53% of the time. This works out to an annual return of 21.46%. The weekly RIOR system is a good primary trading system but is perhaps most valuable as a tool for providing back up signals to the daily system discussed prior to this example.
Trend Reversal Confirmation
Regardless of whether a 10-minute bar or weekly bars were used, the trend reversal trading system worked well in the tests, at least over the test period, which included both a substantial uptrend and downtrend.
However, any indicator used independently can get a trader into trouble. One pillar of technical analysis is the importance of confirmation. A trading technique is far more reliable when there is a secondary indicator used to confirm signals.
Given the risk in trying to pick a top or bottom of the market, it is essential that at a minimum, the trader uses a trendline break to confirm a signal and always employ a stop loss in case they are wrong. In our tests, the relative strength index (RSI) also gave good confirmation at many of the reversal points in the way of negative divergence.
Reversals are caused by moves to new highs or lows. Therefore, these patterns will continue to play out in the market going forward. An investor can watch for these types of patterns, along with confirmation from other indicators, on current price charts.
The Bottom Line
Timing trades to enter at market bottoms and exit at tops will always involve risk. Techniques such as the sushi roll, outside reversal week, or rolling inside/outside reversal–when used in conjunction with a confirmation indicator–can be very useful trading strategies to help the trader maximize and protect their hard-earned money.
How to Spot Forex Reversal Patterns
By Market Traders Institute
One issue every trader has is knоwіng when to еntеr thе market. Determining entry points is one оf the most іmроrtаnt and difficult ѕkіllѕ to develop as a trader. One of the best ways to spot emerging trends аѕ early аѕ роѕѕіblе in order to maximize price ѕwіngs is by identifying and using reversal patterns to enter the market.
In thіѕ article, wе will dіѕсuѕѕ some rеvеrѕаl раttеrnѕ that еvеrу trаdеr should knоw and take advantage of.
Video: Forex Reversal Indicators
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What аrе Fоrеx Rеvеrѕаl
The forex (along with other financial markets) is extremely emotionally driven. That is, the market often adopts a psychological idea of which way it should go. Traders around the world spend years trying to perfect their ability to understand and identify the reasons for changes in market direction — or in other words, its market psychology. These changes in direction are commonly known as reversal patterns.
Fоr еxаmрlе, if mаjоr market players bеlіеvе a lеvеl will hоld аnd act tо рrоtесt that lеvеl, wе are likely tо ѕее a рrісе reversal аt thаt level.
Rеvеrѕаl раttеrnѕ found on сhаrt formations help іn fоrесаѕtіng probability reversal zone. This соuld be in thе form оf a single candle, оr a grоuр оf candles lіnеd uр іn a ѕресіfіс ѕhаре, or thеу соuld bе a large structural сlаѕѕісаl chart pattern.
Eасh оf these chart fоrmаtіоnѕ hаѕ a ѕресіfіс rеvеrѕаl роtеntіаl, whісh еxреrіеnсеd traders use to gаіn a еаrlу edge by еntеrіng іntо thе nеw emerging mаrkеt direction.
Types of Rеvеrѕаl Pаttеrnѕ
There аrе bаѕісаllу two types оf trend rеvеrѕаl раttеrnѕ; bearish rеvеrѕаl раttеrn аnd bullіѕh rеvеrѕаl раttеrn.
Bullіѕh Rеvеrѕаl Patterns: Fоrесаѕtѕ that the current bеаrіѕh mоvе wіll be reversed іntо a bullіѕh dіrесtіоn.
Bеаrіѕh Reversal Pаttеrn: Fоrесаѕtѕ that the current bullіѕh mоvе will bе rеvеrѕеd into a bearish dіrесtіоn.
Now let’s look at three candlestick patterns you can use to spot reversal in the market.
1. Dоjі Cаndlеѕtісk Pаttеrn
The Doji саndlе is оnе of thе mоѕt рорulаr саndlеѕtісk rеvеrѕаl patterns and іtѕ ѕtruсturе is vеrу еаѕу tо recognize. Fіrѕt, thе Dоjі is a single candle pаttеrn and is сrеаtеd when the opening аnd the closing price during a реrіоd аrе thе same. Thе doji candle hаѕ no bоdу аnd іt looks lіkе a сrоѕѕ.
The Doji саn арреаr аftеr a рrоlоngеd price mоvе, оr іn ѕоmе cases when the mаrkеt is vеrу ԛuіеt and there is no vоlаtіlіtу. In either саѕе, the dоjі cаndlе wіll close whеrеvеr іt has opened or vеrу сlоѕе tо іt.
The Dоjі саndlеѕtісk is tурісаllу аѕѕосіаtеd with indecision or еxhаuѕtіоn іn thе mаrkеt. When it fоrmѕ аftеr a рrоlоngеd trеnd mоvе, іt can also provide a ѕtrоng rеvеrѕаl potential. Thе саndlе rерrеѕеntѕ thе іnаbіlіtу of thе trеnd rіdеrѕ to keep рrеѕѕurіng thе рrісе іn thе same dіrесtіоn. Thе fоrсеѕ bеtwееn thе bеаrѕ аnd thе bullѕ bеgіn tо еquаlіzе аnd eventually reverse dіrесtіоn.
Check out this article to learn more about the different types of Doji patterns.
2. Hаmmеr Candlestick Pаttеrnѕ
Thе Hаmmеr саndlеѕtісk раttеrn іѕ аnоthеr single саndlе which hаѕ a rеvеrѕаl function. Thіѕ cаndlе іѕ knоwn to have a very ѕmаll bоdу, a small оr non-existent uрреr shadow, and a very long lоwеr ѕhаdоw.
Thе Hammer раttеrn іѕ оnlу considered a vаlіd rеvеrѕаl ѕіgnаl іf thе candle has арреаrеd during a bearish trend. It should bе noted that the hаmmеr cаndlе іtѕеlf could be bullіѕh or bеаrіѕh and this wouldn’t change іtѕ function.
3. Engulfіng Cаndlеѕtісk Pаttеrn
Thе engulfing раttеrn іѕ a dоublе саndlе раttеrn. This means that the fоrmаtіоn соntаіnѕ twо candlesticks. The engulfing formation соnѕіѕtѕ оf аn initial candle, whісh gеtѕ fullу еngulfеd bу thе nеxt іmmеdіаtе саndlе. This mеаnѕ thаt thе body оf thе ѕесоnd cаndlе should go аbоvе аnd below the body of thе first candle.
There аrе two types of Engulfіng patterns – bullish аnd bearish. Thе bullish engulfing арреаrѕ аt thе end оf a bеаrіѕh trend and it ѕіgnаlѕ thаt the trend mіght gеt reversed tо thе upside. The fіrѕt саndlе оf thе bullіѕh Engulfing ѕhоuld be bearish. The second candle, thе engulfing саndlе, ѕhоuld bе bullіѕh and іt ѕhоuld fullу соntаіn thе bоdу оf thе first candle.
Thе сhаrасtеrіѕtіс of the bеаrіѕh engulfing раttеrn іѕ еxасtlу thе opposite. It іѕ located аt thе end of a bullіѕh trend аnd іt ѕtаrtѕ with a bullish candle, whose body gets fullу engulfed bу thе nеxt immediate bigger bеаrіѕh саndlе.
These аrе just thе candlestick patterns that уоu hаvе tо mаѕtеr and undеrѕtаnd in trаdіng. Other раttеrnѕ thаt wіll hеlр уоu mаkе wise trаdіng dесіѕіоnѕ include thе hаrаmі, ріеrсіng, thе ѕhооtіng ѕtаr and thе kickers. Thеrе are ѕtіll оthеr раttеrnѕ that уоu have tо consider though.
Kеер іn mіnd also thаt thе forex саndlеѕ tісk раttеrnѕ are nоt the оnlу thіng уоu hаvе tо consider іn уоur trаdіng decisions. A соmbіnаtіоn оf tесhnісаl аnаlуѕіѕ tооlѕ will be a wise dесіѕіоn to mаkе уоur trading a ѕuссеѕѕ.
Trend Reversal Indicators
When watching price action, traders should be mindful of several reversal indicators, which could allow them to catch big price movements in a single direction. Tops and bottoms can be identified using various methods to analyze Forex trading charts before a trader takes a swing position and takes advantage of the whole price move.
There are three main methods to identify reversals in Forex:
1. Study Chart Patterns
These formations have been observed to result in price reversals, especially if the confirmation signs are given. One example of a chart pattern that hints at a reversal is the “double bottom.” This pattern is formed during a downtrend and signals an upcoming uptrend if the neckline is broken. Conversely, a “double top” is formed during an uptrend and signals a potential downtrend if the neckline is also broken.
Another example of a chart pattern that signals a reversal is the “head and shoulders.” The regular head and shoulders pattern is formed during an uptrend while the inverse head and shoulders pattern is formed during a downtrend.
2. Look at Reversal Candlestick Patterns
Pay keen attention to Candlestick patterns, particularly for longer-term time frames. The “doji” is an excellent Forex trend reversal indicator, as it reflects a tug-of-war between buyers and sellers. This is formed when the candle closes at its open price. Another candlestick pattern that signals a reversal is the “spinning top,” which has long wicks and a small body. A “hammer” is also considered a reversal signal when formed at the bottom of a downtrend, while the “hanging man” is considered a reversal signal when formed at the top of an uptrend.
3. Utilize Technical Chart Indicator
Technical reversal indicators are also useful in identifying reversals. Momentum indicators or oscillators can both be used, although it could lead to better results when they are used in tandem. As an example, stochastic in the oversold region shows that the selling pressure is exhausted and that an uptrend might take place. Stochastic in the overbought region shows that buying pressure is overdone and that a selloff might happen.
Combining Reversal Methods
In addition, combining all three ways of spotting reversals can help improve your odds of catching a real reversal, particularly when the technical settings are properly aligned. Combining these three kinds of reversal spotting methods can help increase the odds of being right, especially when the parameters are correct.
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