Forex reversal strategies examples
The classics of technical analysis in their works urge traders to trade with the trend. It is really better for beginners to heed these tips, but experienced traders can earn just as much from price reversals. How to determine the moment when one trend ends and the next begins? When to enter the market? In the article, we consider the elements of reversal strategies, methods for determining the turning points in the market.
Reversal Strategy Price Action
Price Action trading strategy is a system consisting of two elements. Its principle of operation is based on a combination of candle patterns and the levels of support and resistance at which they are formed. Of the many formations, two are considered the most popular and accurate reversal models - Pin-bar and External bar. The place of formation of these figures is also important. How to determine the imminent change of trend?
Let's see how the Price Action reversal strategy works. Candle combination External bar. It consists of two candles of different colors. The body and shadow of the second is greater than the body and shadow of the first. The second absorbs the first. The figure was formed at the price level, near which there was previously an impulse fall in prices. This moment was a turning point, and the price again began to plummet.
The second important model, the appearance of which is considered a sign of a trend reversal, consists of one candle. It is formed either at important horizontal levels of support and resistance, or at the top or bottom of the trend. The candle has a short body and a long upper shadow (for an uptrend) or a long lower shadow (for a downtrend).
The candle formed after a strong decline in the price of a currency pair. After its formation, the course went up.
You need to enter the market by breaking a signal candle.
The advantage of the Price Action reversal strategy is its accuracy. Unlike indicators that are redrawn, signals do not lag. You can enter the market and “catch” the trend in its very origin.
Relatively rare signals can be considered a disadvantage. The system works well on higher timeframes from H4 and higher. Candlestick patterns on these time periods appear infrequently.
Trend reversal detection using indicators
A trend reversal can also be determined using indicators - both standard, built-in to the MetaTrader 4 trading platform, and special ones. As an example, let's take two standard tools - Stochastic and RSI with default settings. How to determine the trend with their help?
The overbought zone for the Stochastic indicator is between the levels of 80 and 100, and for the RSI it is between the levels of 70 and 100. After the indicator line falls into this area and begins to leave it, a trend should change to a downward trend. You can use indicators individually and together. In the second case, the accuracy of the signals increases.
After the indicator lines left the overbought zone, the price of the financial asset began to fall.
With the current downtrend, the situation is the opposite. Stochastic and RSI indicator lines should be in the oversold zone. In the case of the standard settings for Stochastic, the zone is between levels 0 and 20. For RSI, this area is slightly wider and lies between lines 0 and 30.
The advantages of an indicator reversal strategy are simplicity and breadth of use. Almost 90% of all indicators are suitable for determining a reversal. You can use even the simplest tools, for example, Moving Average.
The disadvantage of the system is its instability. Most indicators are redrawn, so they require additional filtering. Very often the signals are late. When a trader enters the market, the price can already go through more than half the movement. The indicator method is considered the least accurate of all the methods for determining the trend reversal listed in the article. The use of indicators to find pivot points should be used after testing.
U-turn trading is a risky event, but with the skillful use of a variety of tools can be the main source of profit for the trader. The most efficient systems require a clean schedule.
Since the probable risk when trading on corrections or reversals is high enough, it is recommended to reduce the volume of the transaction to work on counter-trend strategies. Also, you should not hold unprofitable positions for a long time if the pivot point is determined incorrectly. In trading against the trend, you need to act carefully and carefully.