Spotters of trend reversals in FX trading play a very important role to any trader who wishes to maximize profit and minimize risk. The Forex market never sleeps as currency prices continuously shoot upwards and then downwards in trends. However, the linearity in the direction of these trends never holds forever and will definitely go the other way. Knowing when a trend reversal is coming can give traders the opportunity to get into a new trade when the trend just starts in a new direction. Now, let’s talk about how to look for trend reversals and why it matters for Fx trading.
A trend reversal is often the most efficient method to be seen by technical analysis tools. These tools help traders analyze price movements and identify patterns that indicate a change in direction. For example, one common method for identifying trend reversals is the use of support and resistance levels. When a currency pair approaches a support level in a downtrend, it could indicate that the price may reverse and begin to move upward. Even at that, if a price hits at a resisting level in a rising trend but fails to break through the point, then there could be indications that the prevailing trend is reaching a point where it may reverse possibly.
Chart patterns are the most widely applied tool when finding the reversal of the trend. Some of the very recognized patterns are the double tops and bottoms, head and shoulders and inverse head and shoulders. It is a common knowledge that it is a precursor for trend reversals. For example, in the case of a double top pattern, after reaching a top, it tends to pull back a little before failing to surpass that previous top in its attempt. It can be an indicator of the reversal of an uptrend. The price hitting the same low twice, then bouncing higher in a double bottom pattern, may mean the trend about to reverse downward.
Indicators also play an important role in spotting trend reversals. The Relative Strength Index is one of the many indicators that help a trader identify overbought or oversold conditions. If the RSI goes to extreme levels, and it most typically does so at levels above 70 for overbought or levels below 30 for oversold, this can mean that the currency pair is due for a reversal. A change in the RSI from extreme levels back toward the middle range may indicate that the current trend is weakening and a reversal could soon be predicted.
Moving averages are yet another more practical way of detecting trend reversals. A classic signal in a potential rising trend is formed when short-term moving averages move over long-term moving averages – for example, when the short-term 50-day moving average crosses above the longer-term 200-day moving average. Conversely, if the shorter-term moving average crosses below the longer-term moving average, it would indicate a down reversal. It is often traded upon by means of these crossovers.
With experience and proper training, traders can spot on trend reversals. Adding all these together, namely technical analysis, indicators, chart patterns, and market psychology, can significantly help traders catch early signs of trends changing and benefit from emerging trades.
