False signals are quite common, but this is only if you follow the recommendations of the indicator blindly. For example, the last recommendation for a short position with a stop loss at and take profit at seems more than strange. However, the trend direction after the indicated entry point in both cases really turned out to be true, although small.
It all depends on the goals. If you do not use leverage and set long stop orders, then, for example, the first signal could have given you an opportunity to earn not only on the first short upward movement (the first 20 candles), but also the long one (close the long position at the moment the second downward signal appears).
Slava Loza Forex Trader & Analyst
Trend reversal is a change in the general direction of the price movement from upward to downward or vice versa. Anticipating a trend reversal in advance gives you a chance to set up the take profit of a current trade in time or open a position at the best price in the opposite direction.
Trend movements, in general, allow you to make a good profit in the Forex market. And knowing how to identify a trend can be a valuable skill for every market participant.
But let's get back to the matter at hand &#; how does one identify a trend reversal in Forex?
Determining Trend Reversals on the Indicator-Free Chart
Probably, the easiest way to identify a trend reversal is to analyse the movement of a currency pair “by eye”.
You can use price patterns to spot a trend reversal on an indicator-free chart. For example, technical analysis patterns are popular among traders, since finding them on the graph gets a lot easier over time.
The most common reversal patterns are:
The inverted analogs of the given patterns are also reversal signals.
But reversal patterns have disadvantages as well. In particular, you can tell that a trend is going to reverse only when a currency pair has formed a pattern.
Even if you notice an emerging pattern, the theory of technical analysis advises you to take your time opening a trade until the pattern is complete. As a rule, the price will cover the distance equal to a considerable number of points by this time, and the potential profit may be lost.
However, there are ways to predict the reversal of a local trend. They include Price Action strategies, which allow you to determine the future direction of the price based solely on its current movement.
The analysis of candlestick patterns underlies the Price Action strategies. It is an efficient tool that can help you determine the direction and the strength of a trend, as well as potential reversal points.
The most well-known reversal patterns of the Price Action strategy include:
Doji;
Hammer and Hanging Man;
Bullish and Bearish engulfing;
Morning and Evening Star;
Dark-cloud cover and Piercing pattern;
Harami and Harami Cross.
An Example of determining a Trend Reversal Using Technical Analysis Patterns
After a prolonged rally in EUR/USD, the currency pair has formed the “Head and shoulders” pattern.
Having tested the pattern’s neckline, the price headed downwards.
In this case, it’s obvious that we are dealing with a reversal. The pullback wouldn’t be deep compared to the previous upward movement.
Additionally, you can notice candlestick patterns on the chart. The double left “Shoulder” has been formed by the “bearish engulfing” and the “Harami”. The high of the “Head” is another “bearish engulfing”. The “Doji” pattern can be noticed in the right “Shoulder”. Finally, having tested the neckline, the price forms the “bearish engulfing” pattern for the third time.
You can see that the black candlesticks on the right side of the “Head and Shoulders” pattern are longer on the left. White candlesticks, on the contrary, are shorter. It suggests that bears are getting more determined than bulls.
The combination of the described signals is a sufficient reason to predict a possible trend reversal.
Identifying Trend Reversals With Indicators
Technical analysis offers a lot of indicators that can help in spotting trend reversals. As a rule, they represent various combinations of moving averages or oscillator-type indicators.
Using indicators in trading has its advantages, including the following:
Objectivity. The analysis of an indicator-free chart involves searching for technical analysis patterns, the judgment on which is strictly individual. Indicators' signals don’t depend on the opinion of a particular trader and thereby are devoid of subjectivity.
Relative simplicity. The thing is that high-quality analysis of an indicator-free chart requires experience and expert knowledge. It’s usually hard for novice traders to show off such skills. Indicators allow you to receive signals, even if a trader is unable to conduct a comprehensive analysis. Besides, even experienced market participants prefer to rely on indicators’ readings.
Variety of strategies. The combination of various indicators allows you to develop different strategies, many of which prove to be quite efficient in trading.
When trying to spot a reversal, one might find classic indicators available in the MT4 trading terminal quite useful. They include, for example:
Momentum.
Stochastic.
Parabolic.
MACD.
In addition to the basic signals of the oscillators, you should pay attention to additional factors confirming a reversal, such as divergence and volume:
Divergence is the difference between the price and the oscillator charts. Simply put, this is a situation in which each subsequent low on the downtrend graph is lower than the previous one, while each low on the oscillator chart is higher than the previous one. The opposite is true for an uptrend.
Volume is the number of trades made in the Forex market over a particular period. A true reversal momentum is always confirmed by increased trading volumes.
In addition to the classic indicators, reversal signals are also generated by the eunic-brussels.euver indicator. It’s based on the Trix, which is a triple exponential moving average.
The eunic-brussels.euver is displayed in a sub-window below the currency pair chart. It’s perfect for intraday trading, allowing you to quickly make a trading decision even during a sudden trend reversal.
An example of Using the eunic-brussels.euver Indicator to Identify a Trend Reversal
The EURUSD currency pair forms a straight downward channel that allows you to profit both from Sell and Buy trades.
In this case, the eunic-brussels.euver allows you to determine quite precisely when it’s reasonable to open long or short positions. The indicator provides signals using two curves in the sub-window: fast (signal) and slow (major) ones. The crossing of both of these lines acts as a reversal signal.
If the signal line crosses the major one from above, consider it to be a short position.
If the signal line crosses the major one from below, consider it to be a long position.
As you can see from the chart, each of the reversal signals was subsequently confirmed.
Using the Trend Lines Indicator
An easy and reliable way to spot a trend reversal is to use trend lines. Basically, it’s about support and resistance lines.
In this case, a true breakout of the trend line is a reversal signal.
To avoid wasting time on drawing support and resistance on your own, use the automatic trend lines indicator. It spots the most significant lines and automatically plots them on the chart.
The given example illustrates how the EUR/USD currency pair breaks the trend line. The price is steadily heading downwards, after having tested the broken support.
Using the Reversal Points Indicator – Profit Ratio
Profit Ratio refers to the market sentiment indicators. Many of them determine the current ratio of bulls and bears, allowing a trader to choose between opening a long and a short position.
There are also reversal indicators among the market sentiment indicators. The Profit Ratio is one of them.
It calculates the profit ratio, i.e., the percentage of traders whose trades are currently winning. This parameter accurately reflects the false price impulses, which tend to precede reversals. In many cases, this will allow you to identify potential reversal points even before the price movement changes to the opposite.
As the example shows, the Profit Ratio indicator accurately identifies the points on the chart, which then become extremes. For this reason, it is a perfect tool for traders who like countertrend trades.
Don’t Forget About the Risks!
Trading against a trend is a pretty risky practice, as it often results in substantial losses.
However, countertrend trades can yield good profits. They allow you to enter a trade at the very beginning of a trend and use the entire directional price movement.
That is why many traders prefer to take a calculated risk.
Here in the screenshot you can see the chart after the second signal. Divergence really worked, but only in the short term. While in the previous case after the first signal we could leave the position for several days, here it must be closed at the level marked with the yellow line.
Signals are not frequent - sometimes you have to wait several days in the M15 interval, but this is better than nothing. I recommend not to focus on the proposed levels for placing orders and close the positions earlier without leaving them on their own.
Also pay attention to the convergence angles of the indicator lines. The more the lines in the price chart and in the Divergence Solution are directed towards each other, the stronger the signal. For example, in the first screenshot above, the signals are weak: in the first case, the line in the price chart is almost horizontal, in the second - the line in the indicator is almost horizontal. Therefore, the price movement after the reversal is weak.
Conclusion. The Divergence Panel is really good at tracking divergence and showing precise entry points. But do not pay attention to its recommendations for placing orders. Also do not chase long-term profit - open a position in the direction of the arrow, wait for points of profit, move the stop loss to the breakeven level, add a trailing stop and close the entire position at the first hint of a reversal.
There are other divergence indicators. For example, modified versions of MACD and Stochastic with divergence formula added or Divergence Viewer, a complex indicator built on RSI, RVI, MACD, Momentum, Stochastic, Standard Deviation indicator or a couple original indicators, or FXDivergence. These are not for everyone. Although they give frequent signals, I like the Divergence Panel more in terms of performance. If you disagree, we can discuss this in the comments.
3. Trend reversal patterns
A pattern is an often repeating figure in technical candlestick analysis predicting further trend behavior. If you are not familiar with this concept, be sure to read this article, which describes the main patterns. Here I will elaborate on determining reversal levels using this method.
Issues with practical application of patterns:
When a trader sees a formed pattern, sometimes it is already too late to make the decision. For example, the classic Head and Shoulders pattern, where the trader needs to wait until the formation of the second half of the pattern to recognize it, but the right moment of opening a position has already been missed by then.
The concept of patterns is based on the constancy of the formation of the same figure, but the market is chaotic. Emotions and big capital of market makers rule here, and any pattern can turn into a meaningless set of consecutive candles in mere seconds.
If you find a perfectly formed pattern in the chart (as it is drawn in textbooks), please send me a screenshot. There are almost no perfect patterns. It will long before you learn to quickly identify a particular pattern.
Patterns are more of an auxiliary tool supplementing the construction of levels and data of technical indicators. Seeing them is a cool skill, so if you can do that, you can consider yourself a professional.
Remember that people often give in to wishful thinking. If you want to see a pattern confirming the reversal and change in price, you will see it. The problem here is psychological. The appearance of a technical analysis pattern does not necessarily mean a trend reversal or its continuation. A pattern only increases the probability of the event, but does not guarantee it actually happening.
4. Resistance and support levels
This is probably one of the easiest ways to identify potential reversal points. The construction of levels is based on psychology and stereotypes. For example, many traders like round numbers for some reason. And when an accumulation of stops or take profits is formed at some round number level, a strong resistance and support level appears, which in the future again will be perceived by traders as a key level.
If you are not familiar with these tools, check out the following article:
Why levels form. The article explains how local levels form taking into account the psychology of traders and with simple examples.
Another interesting tool is the Fibonacci calculator. The rules for constructing levels depend on their type, but why complicate your life if there are ready-made tools for this? Enter in the calculator the high and low price value of the trend segment under consideration and get the absolute price values &#;&#;in accordance with the Fibonacci percentage levels.
If you are interested in indicators for building levels, leave a comment and I will tell about some of them in a separate review.
5. Pivot points
Pivot points are classic reversal points located between three levels of resistance and support, in which the Forex market mood is most likely to change (from bullish to bearish and vice versa). Calculation formula:
Pivot = (High (H) + Low (L) + Close (C)) / 3, i.e. add the high, low and closing prices. The result is divided by 3.
R1 (Resistance) = Pivot + (Pivot - L)
R2 = Pivot + (H - L)
R3 = High + 2*( Pivot - L)
S1 (Support) = Pivot - (H - Pivot)
S2 = Pivot - (H - L)
S3 = L - 2*(H - Pivot)
The first levels in terms of the likelihood of a reversal are R1 and S1. If the price passes them, the next levels are 2 and 3, respectively. The Pivot point itself is the average position of the price, from which the price goes either to R1 or to S1. You do not need to calculate them manually - analytic resources already have ready-made tables where the data are calculated for all currency pairs with time intervals.
Here we have several controversial issues. First, the decrease in volumes may be caused by other reasons (expectation of news, seasonality, change of sessions). Second, the slowdown often goes into a flat. But the direction of the trend after the flat is much more difficult to predict (here you should add fundamental analysis).
These levels are lines that are in a horizontal position. These lines, with regard to the percentage levels mentioned above, indicate the occurrence of a support and resistance zone. The percentage shows the fluctuation or retraction of the price from the prior move.
Pros
These levels can be formed between price spots, i.e., high/low.
Fibonacci retracement levels are easy to understand.
They are effective in drawing a support and resistance zone.
They indicate a reversal.
They are based on nature.
Cons
They can create false signals to some extent.
Price sometimes doesn’t fall on the support/resistance levels.
Some other tools are signals are required to use with confluence to Fibonacci levels.
Many levels in this system confuse a trader, and he struggles to find the most suited levels.
2. Moving averages
Moving averages are a significant indicator that technical traders use to identify a reversal. These indicators consist of lines, which represent a trend. If a line moves at a higher level, it indicates a bullish trend; on the other hand, the lower line indicates a bearish trend.
The movement of these lines represents the trend reversal in the future. A bearish trend encourages the sell, and a bullish trend promotes buying.
There are many types of moving averages indicators, like,
Pros
Moving averages indicators are easy to understand.
They provide necessary information about a trend reversal.
These indicators generate technical signals.
Even beginners can use these indicators effectively.
Cons
They often lag.
Lagging can lead a trader to miss opportunities.
Often create false signals.
3. Donchian Channel
A Donchian channel is a type of lines that represents the moving averages. It consists of three lines,
Higher band
Middle band
Lower band
A higher band represents a bullish trend, and the lower band refers to a bearish trend. The middle band calculates the averages between the highest highs and the lowest low periods.
A trader can get significant information about a trend reversal as the upper and lower bands provide effective information about the price peaks.
Pros
These are easy to use and very user-friendly.
A user can observe a market in a significant time period of his choice.
They are strong reversal indicators.
They provide information about market breakouts.
Cons
Donchian channels sometimes don’t represent the current market price.
A trade may miss some opportunities.
These channels can generate false signals.
They require a confluence with other indicators or trading tools
4. Bollinger bands
Bollinger bands are a very effective tool for indicating the reversal in a volatile market. They consist of three bands.
Upper band
Middle band
Lower band
The upper band suggests a bullish trend. On the other hand, a lower band represents the bearish market. The movement of these bands indicates a reversal in the market.
Pros
A trader finds these bands very convenient to use.
The beauty of Bollinger Bands is it works in a volatile market.
They help to form a trading strategy regarding the reversals in the market.
Cons
Price actions that occur outside the Bollinger bands can confuse a trader.
Sometimes they can generate false signals.
It is not wiser to use Bollinger bands alone as they require a confluence with other indicators or tools.
5. Relative strength index (RSI)
The relative strength index is a type of oscillator. It is a well-reputed reversal indicator. RSI uses number values ranging from A trader can identify the reversal in the trend by these numbers.
If the number value is below 30, it is a bearish trend. As this number reaches 40/50, it means a trend is changing, which represents the reversal. The value above 70 is a peak bullish trend and a strong buying signal.
Pros
It is a very easy-to-use indicator. All you have to do is read the number values like a high school kid.
RSI is a strong reversal indicator.
It indicates the price behavior in a market.
It provides information about the valuation of an asset.
Cons
It can create false reversal signals.
In the case of a trading range, RSI is not an effective indicator.
In shorter trends, a trader can’t rely on this indicator.
Advantages of using reversal indicators
Modern technical traders promote the use of reversal indicators. There are the following advantages of using the reversal indicators.
They provide information about future market trends.
These indicators facilitate a trader in his crucial decisions.
Reversal indicators provide significant information to traders about the opening and closing of the trade.
They help in controlling the emotional state of the traders and promote wiser decisions.
The confluence of these indicators enhances the success ratio.
Conclusion
Reversal indicators are very important technical trading tools. They aid traders in multiple ways regarding current and future decisions. The use of the reversal indicators can impact the profits/losses to improve the trading experience of a trader.
The confluence of reversal indicators with other technical tools can enhance the success ratio.
Profit 99 Reversal Trading Indicator is a NON-Repaint indicator system that gives easy-to-use buy/sell signals. It usually being sold for 97$ a Life Time. It comes with an ON-SCREEN Symbol and time frame changer.
Profit 99 Reversal Trading is a trend reversal trading system that can be used at all time frames but also as day trading. The system is based on the Profit 99 indicator which looks for the extreme areas of the market as a reversal. We have therefore framed this indicator within a scheme that facilitates the search for only the best signals. The way to filter the signals is composed of the TMAs and the support and resistance zones.
The Reversal Trading Strategy uses signals from multiple technical indicators to enter the market, such as trend trading, countertrend trading, and others. This increases the chances of sustained growth and reduces exposure to a single pair or individual operations.
Itcatches very fast and profitable price movements and gives you easy BUY/ SELL signals. The system very carefully verifies every trading signal to produce only the highest probability trades.
Profit 99 system can give you trading signals you can take as they are or add your additional chart analysis to filter the signals further, which is recommended. While traders of all experience levels can use this system, it can be beneficial to practice trading on an MT4 demo account until you become consistent and confident enough to go live.
Follow money management & Don’t enter to trade within the high-impact news period. Exit from your trades before half & an hour from the high-impact forex news.
No Minimum Deposit ECN Acount No Commission
Min Deposit of 20$ Allow USA Traders Levergae up to
Download a Collection of Indicators, Courses, and EA for FREE
You can set the Profit 99 Indicator System to send you a signal alert via Email, Mobile Notification, or platform pop-ups. This is helpful as it means you do not need to stare at the charts all day waiting for signals to appear, and you can monitor multiple charts all at once.
Reversal Trading Indicator system can be used on any Forex currency pair and other assets such as stocks, commodities, cryptos, precious metals, oil, gas, etc. You can also use it on any time frame that suits you best,from the 5-minute through to the 1-month charts.
How to Use this Reversal Trading Indicator
Buy
The price touches or exits the lowerTMA band.
The price rests on a support zone (recommended).
Profit 99 indicator GreenBuy dot.
Sell
The price touches or exits the upper TMA band.
The price rests on a resistance zone (recommended).
Profit 99 indicator Red Sell dot.
Exit position
Place initial stop loss below the previous swing high/low or below/above the support/resistance zone.
Make a profit at the middle band or opposite TMA band.
Note: To apply the strategy you have to open many charts and look for the best opportunities.
Litefinance">Oleg Tkachenkoeunic-brussels.eu
Trend trading is one of the most common strategies among novice traders. Its difficulty is determining the moment of a potential reversal, before which the trader must close the position or, vice versa, immediately enter the market at the beginning of a new trend. A trader should understand that this is a reversal, not a correction, and they can use tools such as reversal indicators, divergence, patterns or pivot points. In this review you will learn how to use these tools and what their advantages and disadvantages are.
The article covers the following subjects:
How to predict a trend reversal: overview of analysis tools
What could be simpler and more effective than trend trading? It would seem that you just need to encounter a strong movement, stock up on capital to withstand small local reversals and watch the deposit grow. But in practice you are sure to stumble upon several questions:
How do I know whether a price reversal against the main trend is a local correction or a new opposite trend?
How to predict the moment when the strength of the trend runs out and the price line reverses?
How to calculate the resistance and support levels at which a reversal signal or, on the contrary, a trend continuation signal can appear?
I will try to answer all these questions in this review by introducing the basic tools for determining potential trend reversal points. Some things are from personal experience, others from trading forums and blogs. I welcome any criticism and comments in the comment section of the review.
Trend reversal point forecasting tools
A strong trend is a significant market dominance of either sellers (a growing trend) or buyers (a falling trend). At some point, the number of traders of the prevailing party and the volume of their positions are reduced, the price slows down until the moment of equilibrium. At that moment, when the weaker side turns into the stronger side, a reversal occurs. The trader’s goal is to predict and use this moment for their own purposes.
The following tools exist for determining the price reversal point:
Technical analysis indicators.
Divergence.
Trend reversal patterns.
Levels (resistance and support, Fibonacci).
Pivot points.
Let us consider these tools in more detail.
1. Technical analysis reversal indicators
There are hundreds of reversal indicators and each of them works according to its own principle. I will not analyze examples in detail, I will only describe groups of such indicators in general terms:
Oscillators. Reversal indicators that identify overbought and oversold zones. If the oscillator is in the overbought zone, it reverses and prepares to exit it, then we can talk about a potential change in the direction of the current trend. It is important that the indicator exits the zone at as close as possible to a 90° angle with respect to the horizontal border of the zone. Examples: Stochastic, RSI, DeMarker.
Channel indicators. In theory, the price aims to reach its equilibrium value, i.e. the state of balance between supply and demand. When it moves away from its average value, the balance is violated, but sooner or later, the price comes back again. The amplitude of price fluctuations forms a channel, and most often reversals occur at the borders of this channel. Examples of such indicators: Bollinger Bands, Donchian Channel.
Classic simple indicators with different periods. Most often, moving averages (simple, exponential), stochastics, etc. are used. Determining the pivot point is basically waiting for the moment when all the lines converge together, after which the trend will reverse and the indicators will diverge. Examples of such strategies with Stochastics (Spud’s thread), MA, Alligator and Anti-Alligator are described in this review.
Remember that indicators are just algorithms built on a particular mathematical formula. They have many shortcomings: they lag and do not take into account the fast-changing character of the market situation, i.e. the illogical actions of big capital owners. They are constantly improved, various smoothing models are used, but this does not significantly affect the signal performance. Therefore, be careful when relying on the signals of reversal indicators: double-check them on other timeframes, compare with the data of other tools - in a word, do not be afraid to experiment. Finding an accurate trend reversal indicator is not so easy.
2. Divergence
Divergence is the discrepancy between the technical indicator and price direction. In other words, the indicator shows that the market is overbought and moves down from the signal zone, while the price, on the contrary, continues to grow. The reason is that the indicator leading and the price is inert, so it reverses immediately after the indicator. Divergence is an additional but stronger signal that predicts a reversal. All that is left is to notice it in the chart. This is not always easy though.
The most common strategy described on many forums is the search for divergence using RSI, MACD and slow stochastics. But there is an opinion that RSI is not suitable for finding discrepancies, so you will have to try yourself.
Question to professional traders working with divergence: what indicator would you recommend, and what are the optimal settings and timeframe?
Read more about divergence in the following review:
What is Divergence on Forex. This is an extended review explaining how to build divergence lines, how to find it in the chart, and what the most common mistakes are.
Divergence is not for everyone as too many nuances must be taken into account that can otherwise lead to an error. You should only use it in a live account when you have a trained eye to see it instantly. If you still need to build lines and double-check everything, perfect your skills on a demo account.
However, you can go the simpler way: why draw lines if you can use ready-made combined tools? One of the most popular indicators in trading circles is the Divergence Panel. You can download it here, installation is standard (if you need help, leave a comment below).
Forex Brokers We Recommend in Your Region
See full brokers list
As the name suggests, trend reversals are a reversal in price direction. Understanding how to trade reversals means you can enter a brand-new trend near its beginning or exit the market before it goes in the opposite direction.
Let’s get started.
Let’s first define a trend. A trend is when the price moves consistently in an upward or downward direction:
An uptrend is a series of rising support levels with higher highs.
A downtrend is a series of lower highs and lower lows.
A trend reversal is when the price reverses the trend in the opposite direction.
Within the area of the circle, the price will make a ‘reversal pattern.’ The reversal pattern can be quick with little volatility or might take a long time to form with lots of volatility. Reversals come in different forms, so let’s look at some methods you can use to identify these patterns.
Method 1: A Break in the Trend
There are two types of trend breaks:
A break of the last significant support or resistance.
A break of the trendline.
Break of support or resistance in a trend:
Pros: I prefer this method to a trendline break because it is more reliable. A support or resistance level shows key buying or selling at a specific price level, and when the price breaks that level, it signals that this segment of the trend is ‘officially’ over.
Cons: If the previous support or resistance in a trend is far from the current price level, I can lose a sizeable amount of profit before I realize the trend is over.
Break of a trendline:
Pros: A trendline can give an earlier signal than waiting for the price to break previous support or resistance.
Cons: There are more false breaks of trendlines compared to false breaks of support or resistance levels in a trend. I am constantly redrawing trendlines because the price breaks my previous trendline, but the price often continues in the same direction.
A break of trend, either from a trendline break or support/resistance break, does not mean the price will automatically reverse direction. The price could go sideways instead and then continue the previous trend. It is better to wait for a new trend to develop in the opposite direction to be sure of a reversal.
Method 2: A Chart Reversal Pattern
Chart patterns in Forex or other markets are my favourite methods to spot a trend reversal—it is more reliable than a simple trend break because it more often results in the price moving in the opposite direction of the previous trend.
Let’s look at some key types of reversal patterns.
Double & Triple Tops: These are the easiest patterns in technical analysis to spot because they are the simplest.
A Double Top/Bottom: The price hits the same level twice to form a support or resistance before reversing direction.
A Triple Top/Bottom: The price hits the same level three times to form a support or resistance before reversing direction.
Which is better—a double or triple top/bottom? A triple is better than a double top or bottom because the price has rejected the level more times, showing a stronger sentiment of rejection.
The size of the pattern is important: For example, a larger double top is a stronger signal than a smaller triple top.
Let’s look at an example of a double-top and break down an actual trade. I’ll take this trade step-by-step to show how the price action and double top pattern showed a clear trend reversal in advance.
The price is moving in a nice uptrend but suddenly accelerates when making a new high. A price acceleration should be a warning that there can be an equally steep pullback. That is precisely what happened here—the price sold off very quickly. At this point, it is too early to know if the price will make a double top.
Next, the price reaches the previous high and makes a ‘rounded top’ formation to create a double top. A rounded top is a strong pattern by itself and even stronger when it’s part of a larger pattern, such as a double top.
After the rounded top, the price sells off quickly, showing clear bearish sentiment.
At this point, we can sell into pullbacks, perhaps using Fibonacci retracement levels to find entries. The price makes a series of lower highs which signifies a downtrend.
Head and Shoulders:
These are more complex than double or triple tops/bottoms, more subjective, and harder to spot. So, why trade them? Simply because head and shoulders patterns do happen, and they are powerful reversal patterns.
A head and shoulders pattern consists of three tops, but the central top is higher than the one on either side, representing a head with two shoulders next to it. Reverse this logic for an inverse head & shoulders with a bottom lower than the two shoulders next to it.
It is essential to wait for the price to break the neckline to complete the pattern. Before the neckline breaks, it’s only a potential head and shoulders pattern, not a complete reversal pattern.
Here’s a great example of a head and shoulders pattern on the AUD/USD daily chart.
Notice how the price re-tested the neckline as resistance (marked with the white arrows). This provides excellent entry opportunities, especially the second retest, because it’s a healthy bearish pin bar.
Good chart patterns can take time to complete. In this example, the AUD/USD head and shoulders pattern took about candles (six months) to complete! Of course, on smaller timeframes, the time to completion would be proportionally smaller. For example, a head and shoulders pattern with the same number of candlesticks on an hourly chart may take a few days to complete.
Bi-lateral patterns: These are usually triangle formations.
The tricky thing about these patterns is that they can be either continuation patterns, i.e., continuing the previous direction of the trend, or reversal patterns. We must wait for the price to break out on one side of the triangle to determine whether it’s more likely to be a reversal or continuation.
Here’s an example on the EUR/USD 4-hour chart.
So far, I have only looked at pure price action—the bedrock of technical analysis. That said, indicators can provide vital clues to assess direction. Let’s look at the most used indicators for identifying trend reversals.
Moving Averages:
Moving averages, or MAs, are the most popular type of indicator in technical analysis, and trend traders love them because they quickly shows where the price is in relation to its momentum.
How is a moving average calculated? A moving average calculates the average closing price of a specified number of candles. For example, a period moving average calculates the average closing price of the last ten candles and plots this data as a line.
Types of Moving Averages:
A Simple Moving Average (SMA) calculates a simple average or ‘mean’ of closing prices.
An Exponential Moving Average (EMA) gives a higher weighting to the most recent closing prices.
How to Read a Moving Average:
When the price is above a moving average, it has upward momentum.
When the price is below a moving average, it has downward momentum.
Using Two Moving Averages: Placing a single moving average on a chart and watching the price wiggle around the line is not a sophisticated way to get information about price momentum. A better way is to place two moving averages on the chart:
A fast MA calculates the line using a smaller number of closing prices and is seen closer to the price. A slow MA calculates the line using a larger number of closing prices.
When the fast MA crosses the slow MA from below, it’s a bullish signal.
When the fast MA crosses the slow MA from above, it’s a bearish signal.
Golden Cross Moving Averages: A popular moving average setup is a 50 EMA and EMA on a daily chart. These settings have been called the “golden cross” or “bull cross.”
Here is the golden cross in action on a daily chart of Gold in USD. I happen to be looking at Gold for this, but that has nothing to do with the name, golden cross! I can use the golden cross settings on a Forex pair, stocks, etc. The golden cross in recent years has been a very effective long-term buy signal in the S&P Index.
The golden cross on this chart shows nicely how it captured a long bullish trend starting in when the 50 EMA crossed the EMA from below. It would have kept you in the trade all the way to the beginning of when the 50 EMA crosses below the EMA, this time from above.
When trading reversal indicators in Forex or other markets, I would not use moving average crossovers like this by themselves—I would also look at support and resistance and chart patterns—but these indicators can alert you to potential new trends or reversals.
Other trend reversal indicators: Moving averages are not the only trend indicator. Traders also commonly use MACDs (derived from moving averages) and pivot points to identify trend reversals.
I will break this down into a step-by-step process using the ideas so far in this article.
Step 1: Identify a trend. Make sure it’s clear, and mark the rising supports if it is an uptrend or falling resistances if it is a downtrend. The trend may also have a clear trendline.
Step 2: Wait for the trend to break. For example:
The price breaks the most recent support for an uptrend or resistance for a downtrend.
The price breaks the trendline.
A momentum indicator can also assist in signalling that a trend has ended.
Step 3. Look for a confirmation that the price will reverse. The price may immediately begin to reverse with a new trend in place. However, more often than not, there will be a reversal pattern, e.g., double/triple top or bottom, or a more complex chart reversal pattern, such as a head and shoulders or rounded top/bottom pattern.
When trading Forex reversals, there are often clear technical signals that the trend has ended and a new one is about to start in the opposite direction. Go through a step-by-step process of marking the critical areas of a trend: horizontal support and resistance levels and trendlines. When the price breaks these levels, that segment of the trend is most likely over. That does not automatically mean the trend will reverse—the price could go sideways for a long time— but the previous segment of a trend has finished for now. The price must establish new momentum in either the original direction of the trend or the opposite direction.
A reversal pattern is an excellent indication that the new momentum will be in the opposite direction, and that’s an opportunity to enter the market in the direction of a new trend.
How do you confirm reversals?
You can confirm reversals when the previous trend has broken and a new trend has begun to move in the opposite direction.
Which type of indicators are used to find reversals in the market?
Moving Averages, MACDs, and Pivot Points are the most popular indicators used to find reversals in the market.
What is the best indicator for reversals?
Moving averages are widely held to be the best indicator for identifying reversals.
What are reversal indicators?
A reversal indicator helps to show that the price is reversing direction from the previous direction of the trend.
Huzefa Hamid
I’m a trader and manage my own capital. I trade the major Forex pairs, some Futures contracts, and I rely entirely on Technical Analysis to place my trades. Today, I am also a Senior Analyst for eunic-brussels.eu I began trading the markets in the early s, at the age of sixteen. I had a few hundred British pounds saved up (I grew up in England), with which I was able to open a small account with some help from my Dad. I started my trading journey by buying UK equities that I had read about in the business sections of newspapers. The s were a bull market, so naturally, I made money. I was fortunate enough in my early twenties to have a friend that recommended a Technical Analysis course run by a British trader who emphasized raw chart analysis without indicators. Having this first-principles approach to charts influences how I trade to this day.
After 2 rises and two decelerations, the reversal did not happen. Should you rely on slowdown? You decide.
Finally, a few tips for novice traders:
Do not rush to jump into the last car of the departing train. If the price is gaining momentum, there is no need to rush to open a position in its direction. It may be that serious players are just waiting for the lemmings to enter the market almost at the high to push them out with their large volumes in the opposite direction. Professional traders enter the market at the beginning of the trend and exit when the lemmings raise the price in an effort to get some easy money.
Try to use several instruments at the same time to predict trend reversal points. But do not be surprised if they all give different information. Deal with one, then move on to the other.
Take your time when deciding to drop the instrument. Perhaps you have chosen the wrong timeframe, the wrong asset, or simply haven’t figured out some quirk.
Do not use reversal tools blindly. First, develop a trading strategy, work out a risk management system. You must understand the error margin you can withstand for a given lot size and leverage if the reversal point is in another place or the reversal turns out to be a correction. Learn how to calculate the lot volume here.
Keep in mind that a trend reversal may occur suddenly under pressure from big capital owners. In other words, the reversal is not always preceded by a slowdown in the price chart.
Use multiple timeframes for analysis.
Conclusion. There is a multitude of tools for predicting trend reversal points, but none of them are perfect. The attempt to combine them can further confuse you and lead to negative results. Remember that the behavior of financial markets can never be predicted %. And if Forex indicators do not live up to expectations, it means either you have configured them incorrectly or have not yet learned to use them properly.
If you have any problems with the above tools, be sure to mention it in the comments. LiteFinance has a team of professional traders and analysts who are always happy to share their knowledge with beginners. Feel free to ask questions, let's succeed together!
P.S. Did you like my article? Share it in social networks: it will be the best "thank you" :)
Ask me questions and comment below. I'll be glad to answer your questions and give necessary explanations.
Useful links:
I recommend trying to trade with a reliable broker here. The system allows you to trade by yourself or copy successful traders from all across the globe.
Use my promo code BLOG for getting deposit bonus 50% on LiteFinance platform. Just enter this code in the appropriate field while depositing your trading account.
Telegram chat for traders: eunic-brussels.eu We are sharing the signals and trading experience
Telegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders eunic-brussels.eu
Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive /39/EC.
Divergence Panel is an information panel with buy and sell signals for all currency pairs and timeframes. In the archive downloaded from the link above you will see another file - Divergence Solution. It is a modified MACD without an additional moving average. Divergence Panel was created based on it. These two indicators are pretty much the same, the only difference is in the output format. I would use the Divergence Panel as the main divergence indicator, but you should open Divergence Solution too.
The indicator is interesting in that it analyzes all the standard timeframes of the main currency pairs. Its settings allow you to analyze any combination of pairs and timeframes. The indicator has more than 20 settings, so it is better to leave them unchanged for testing. They are for ZigZag, RSI, EMA and ATR indicators, which are also in the Divergence Panel.
Features of the Divergence Panel:
In addition to entry points, the indicator gives recommendations on setting Stop Loss and Take Profit.
In the indicator panel, you can set the required currency pair and timeframe in the Chart window.
In the chart, the indicator draws lines of confirmation of divergence, highlights the signal area and shows the recommended entry points with arrows.
Here is an example of such a table built for an hourly interval. You can also use the pivot point calculator. Fill in the data for the three points used in the formula and you will get the result.
In addition to the classic Pivot points, there are also other points:
1. Fibonacci. These are the same Fibonacci levels, so the formula is the same as well.
2. Camarilla. Here, 4 levels are calculated instead of 3. Why the author took such coefficients is a rhetorical question, but stop loss and take profit orders are most often set on these levels. Calculation formula:
R4 = (H - L)*1,1/2 + C
R3 = (H - L)*1,1/4 + C
R2 = (H - L)*1,1/6 + C
R1 = (H - L)*1,1/12 + C
S1 = C - (H - L)*1,1/12
S2 = C - (H - L)*1,1/6
S3 = C - (H - L)*1,1/4
S4 = C - (H - L)*1,1/2
3. Woody. The difference from the classic version is that the weight of the closing price candle is doubled. Calculation formula:
Pivot = (H + L + 2 *C) /4.
R1 = 2*Pivot - L
R2 = Pivot + H - L
S1 = 2* Pivot - H
S2 = Pivot - H + L
4. DeMarker. Calculation formula:
If the closing price is less than the opening price, then Pivot = H + 2 * L + C
If the closing price is greater than the opening price, then Pivot = 2 * H + L + C
If the closing price is equal to the opening price, then Pivot = H + L + 2 * C
S1 = Pivot/2 - L
R1 = Pivot/2 + H
There is no indicator in MT4 building Pivot levels according to one or another scheme. So you need to download, install it and do experiments.
The idea of &#;&#;calculating Pivot points is somewhat similar to MA. The formulas differ by the weight of one or another price. There are no ideal formulas, because it is only up to you to decide which points you will use. The tool is auxiliary and can work in certain local situations for certain pairs. Remember that this is just a mathematical algorithm that does not take into account any fundamental factors.
In order to work with the tool, the trader needs to know the average volatility for the required period (it can be found on analytical resources) and the direction of the trend. If the price is above the Pivot point, it makes sense to bet on a long position, taking into account the fact that the price can turn around at the R1 level. If the reversal has not occurred, the target level is R2. If the position is open at the R1 level, then R2 and R3 are the target for closing the position. However, how you use the Pivot levels is entirely up to you.
In the trading manuals, there is one more sign of an approaching reversal - a slowdown in trend movement. The slowdown is a transition to horizontal movement, a decrease in amplitude, etc. – i.e. a decrease in the activity of traders and trading volumes. This deceleration is visible in the figure below due to the increasingly horizontal lines.