What is Trend Reversal?

A trend reversal is the complete turn of the price of an asset from moving in a particular direction to the opposite direction.

A trend reversal is long and sustained as opposed to a pullback.

A pullback is only temporary before the resumption of the initial trend.

If the price has been on an uptrend, a trend reversal occurs when the price changes to a downtrend.

On the other hand, a price which was falling will have a trend reversal when it changes to an uptrend.

Most traders have formulated strategies around trend reversals and used them to make money trading.

We refer to such trading strategies as trend reversal strategies.

Trading Trend Reversal Strategies.

There are so many trend reversal strategies around.

The best of them are actually those based on support or resistance and the resulting setups of breakouts and pullbacks.

The market moves in phases, and such phases are so significant in trading trend reversals.

It is some of such phases of the market which coincide with support or resistance.

Other phases lead to resultant setups of breakouts and pullbacks which are traded with respect to trend reversals occurring at support and resistance levels.

Example.

1. Consolidation at a Downtrend.

This is a price range in a downtrend.

It means that sellers and buyers are in a state of equal strength and that is the reason the market is not showing any particular trend.

Here, you will observe almost an equal number and size of bullish and bearish candlesticks.

If you had applied any moving averages, they will be horizontal and the price will be moving up and down about them.

This stage will only be significant if we have a support level at the lower limit where the price seems to range.

The support level is best identified in a larger time frame than the time frame of observing the price consolidation.

Do you have a support level identified at a larger time frame?

Does it form the lower limit of the range in which the price is consolidating?

If yes, then it means that you can almost be sure that the price which had been on a downtrend before consolidation will now reverse upwards.

In this phase, you can begin trading the upward trend reversal.

Place a buy order at the level of the identified support level.

Take profit at the upper limit of the consolidation and stop loss just below the support level identified.

2. Price Rise.

Having a support level at the lower limit of the price consolidation in the previous phase hints at a trend reversal.

That means that the price will ultimately break out of the upper limit of the range and rally upwards.

This then is the price rise phase because the downtrend has reversed into an uptrend after price consolidation.

Now, in this phase, you can continue trading the trend reversal which happened at the first phase.

You can buy when the price breaks out at the upper limit of the consolidation which happened at the first phase.

This is only if so much price momentum preceded the breakout.

If you don’t trust the breakout, wait for a retest of that broken limit.

It will appear as a pullback because the price will have to fall back to the upper limit of the broken range, several times, without breaking it downwards, before you enter a buy position.

Why buy with certainty?

It’s undeniable that an upward trend reversal already occurred at the support level identified. Use Trailing Stop Losses to take profits.

3. Consolidation at an Uptrend.

This is a price range in an uptrend.

It means that buyers and sellers are in a state of equal strength and that is the reason the market is not showing any particular trend.

Here, you will observe almost an equal number and size of bullish and bearish candlesticks.

If you had applied any moving averages, they will be horizontal and the price will be moving up and down about them.

This stage will only be significant if we have a resistance level at the upper limit where the price seems to range.

Also Read: – HOW TO TRADE PULLBACKS IN OLYMP TRADE LIKE A PRO.

The resistance level is best identified in a larger time frame than the time frame of observing the price consolidation.

Do you have a resistance level identified at a larger time frame?

Does it form the upper limit of the range in which the price is consolidating?

If yes, it means that you can almost be sure that the price which had been on an uptrend before consolidation will now reverse downwards.

In this phase, you can begin trading the downward trend reversal.

Place a sell order at the level of the identified resistance level.

Take profit at the lower limit of the consolidation and stop loss just above the resistance level identified.

4. Price Fall.

Having a resistance level at the upper limit of the price consolidation in the previous phase hints at a trend reversal.

That means that the price will ultimately break out of the lower limit of the range and rally downwards.

This then is the price fall phase because the uptrend has reversed into a downtrend after price consolidation.

Now, in this phase, you can continue trading the trend reversal which happened in the third phase.

You can sell when the price breaks out at the lower limit of the consolidation which happened in the third phase.

This is only if so much price momentum preceded the breakout.

If you don’t trust the breakout, wait for a retest of that broken limit.

It will actually appear as a pullback.

The price will have to rise back to the lower limit of the broken range, several times, without breaking it upwards, before you enter a sell position.

Why sell with certainty?

It’s indisputable that a downward trend reversal already occurred at the resistance level identified.

Use Trailing Stop Losses to take profits.