7 Best Trend Reversal Indicators to Use to Find Reversal Points

The trend is your friend! Ever heard of that phrase? Well, it’s true – and especially when you’re trading on either Stock or Forex platforms. But what happens when the trend comes to an end? How do you know when a reversal is about to occur? There are a few reversal indicators that can help you out. In this blog post, I will introduce you to 7 ideal trend reversal indicators that you can use to find those all-important reversal points.

1). Moving Average Convergence Divergence (MACD).

The first indicator on our list is the moving average convergence divergence (MACD).

The MACD is a momentum oscillator that measures the distance between two moving averages.

Basically, it’s used to spot changes in the strength, direction, and momentum of a trend. And as you can see from the chart below, you can also use the MACD to find trend reversals.

Basic Signals Provided by MACD.

How do you identify when a trend is about to reverse with the MACD?

Look for when the MACD line (the blue line) crosses below the signal line (the red line) or vice versa.

Depending on if it crosses from the top to the bottom or from the bottom to the top will give you a signal of either a bullish or bearish reversal.

Another way to use the MACD is to look for divergences.

A divergence occurs when the price of an asset moves in one direction while the MACD line moves in the opposite direction.

This is usually an indication that the current trend is about to reverse.

Note:

The moving average convergence divergence can be a great tool for finding reversals, but it’s not perfect.

Sometimes, you will see false positives (signals that look like they’re about to reverse but don’t) or false negatives (signals that don’t look like they’re about to reverse but do).

This is why it’s important to use the MACD in conjunction with other indicators to improve your chances of success.

2). Trend Lines.

Trend lines are one of the most basic yet effective indicators out there.

They are used to connect price highs or lows in order to identify a trend.

If the line is going up, it’s an uptrend; if the line is going down, it’s a downtrend.

Just like all the other indicators mentioned in this list, you can use trend lines to find reversals.

How?

By looking for a break in the trend line.

If the price breaks below a downtrend line, it’s likely that a reversal is about to occur.

On the other hand, if the price breaks above an uptrend line, it’s also likely that a reversal is about to occur.

Trendline strategy

The trend line break is a popular reversal signal because it’s one of the easiest to spot.

However, just like the MACD, there will be false signals from time to time.

This is why, once again, it’s important to use trend lines in conjunction with other indicators for confirmation of reversal signals.

3). Price Channels.

A price channel is simply two parallel trend lines that are used to identify a trading range.

The upper trend line acts as resistance while the lower trend line acts as support.

Just like with trend lines, you can use price channels to find reversals by looking for a break in the channel.

If the price breaks below the lower trend line, it’s likely that a bearish reversal is about to occur.

On the other hand, if the price breaks above the upper trend line, it’s likely that a bullish reversal is about to occur.

 

Support and Resistance

The benefit of using price channels over trend lines is that they can help you better identify trading ranges and/or define trends.

This is because price channels take into account the highs and lows of the price, while trend lines only take into account the highs or lows.

However, price channels do have their own drawbacks.

The main one being that they are often subject to interpretation.

Once again, it’s important to use price channels in conjunction with other indicators for confirmation of reversal signals.

4). Moving Average.

MA or moving averages are some of the best forex reversal indicators.

To someone totally green about what moving averages are and how they work, they are lagging indicators that smooth out price action and help identify trends.

Though there are many moving averages, these two are the most popular and the most commonly used: simple moving averages (SMAs) and exponential moving averages (EMAs).

The difference between the two is that SMAs calculate the average over a certain period of time, while EMAs give more weight to the most recent data.

How do you use moving averages to find reversals?

The most common way is to look for a crossover.

A bullish crossover occurs when the price of an asset moves above the MA, while a bearish crossover occurs when the price of an asset moves below the MA.

Use these crossovers to generate buy and sell signals.

 

 

EMA signals

The MA is a popular indicator because it’s easy to use and understand.

It’s also one of the most reliable reversal indicators.

However, just like all the other indicators on this list, there will be false signals from time to time. So, once again, it’s important to combine MA with other trend reversal indicators to find the best trend reversal signals.

5). Donchian Channel.

The Donchian channel is an indicator that was popularized by Richard Donchian, one of the pioneers of technical analysis.

The Donchian channel consists of three lines:

  1. The upper band, which is the highest price over a certain period of time;
  2. Lower band, which is the lowest price over a certain period of time; and
  3. The middle line, which is the 20-period moving average.

The Donchian channel is used to find reversals by looking for price action breakouts.

A bullish breakout occurs when the price of an asset moves above the upper band, while a bearish breakout occurs when the price of an asset moves below the lower band.

Donchian channel profit scheme

The Donchian channel is a powerful reversal indicator because it takes into account the highs and lows of the price.

However, you can still get situations when things go south. Use other reversals rend indicators together with the Donchian Channel to mitigate losses.

6). Relative Strengthening Index (RSI).

The RSI is a momentum indicator that was developed by J. Welles Wilder.

The RSI is used to find reversals by measuring the speed and change of price movements.

Like most indicators, the RSI has a scale of 0-100 and it’s considered overbought when it’s above 70 and oversold when it’s below 30.

RSI in Olymp Trade

The most common way to use the RSI is to look for a divergence.

A bullish divergence occurs when the price of an asset makes a higher low, while the RSI makes a lower low.

This is an indication that the price is about to move up.

On the other hand, a bearish divergence occurs when the price of an asset makes a lower high, while the RSI makes a higher high.

This is an indication that the price is about to move down.

Oversold assets in RSI

7). Bollinger Bands.

The Bollinger Band is an indicator that was developed by John Bollinger.

It consists of three lines:

  • The upper band, which is the 20-period moving average plus two standard deviations;
  • Lower band, which is the 20-period moving average minus two standard deviations; and
  • The middle line is the 20-period moving average.

The Bollinger Band is used to find reversals by looking for price action breakouts.

A bullish breakout occurs when the price of an asset moves above the upper band, while a bearish breakout occurs when the price of an asset moves below the lower band.

Bollinger squeeze

Frequently Asked Questions.

The most common reversal signals are crossovers, breakouts, and divergences.

A trend reversal indicator is a tool that is used to find reversals in the financial markets.

The best trend reversal indicators are MA, Donchian Channel, RSI, and Bollinger Bands.

Use these indicators to find the best reversal points and remember, reversal signals are even more valuable if confirmed.

Conclusion.

There you have it, the seven best trend reversal indicators that you can use to find reversals in the financial markets.

Did I miss your favorite trend reversal indicator? Tell me about it in the comments below.

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