Tips on How to Trade With the Trend and Spot Reversals

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Trading reversals is a popular trading style. Traders tend to wish for picking the exact bottom and top and catching a strong reversal. One of the issues is that reversals are not that common. Another challenge is that trading reversals actually requires more precision than trading with trend setups.

This article explains the key factors when trading reversals and what traders should focus on.

I know. My first tip with trading reversals is. actually not to trade them. My feedback is rooted solely in my own mistakes.

Trading reversals might seem exciting, but it requires more experience. In my view, traders are better off with learning how to trade with the trend rather than picking exact turning spots.

Trading with the trend also requires developing a strategy and a trading plan, but ultimately, it’s easy to observe by adding a trend channel or 1-2 moving averages on the chart.

Finding reversal spots requires a trained eye to spot a Support or Resistance zone where the price will stop and turn into the opposite direction. This is easier to do once you have been trading for a while, but not on your first day.

Tip #2: Use Candlestick Patterns

As mentioned above, picking tops and bottoms is difficult, but there is a way for traders to recognise turning spots – candlestick patterns.

Here’s an example: the EUR/USD is approaching 1.25 key resistance level, but you are unsure to trade the reversal right at 1.25. The alternative could be to wait for a bearish candlestick pattern on the 4h or daily chart.

Once a bearish candlestick pattern appears, traders receive a confirmation from the market that the 1.25 level is, indeed, important. There is a higher chance that the price is responding to the 1.25 resistance, and that it will correct deeper.

Source: MetaTrader 4: Supreme Edition, EUR/USD daily chart, December 22, 2020, to March 1, 2020 – Please note: Past performance is not a reliable indicator of future results.

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Tip #3: Find Points of Confluence

The concept of Support & Resistance (S&R) is key for trading. It is part of the market structure triangle that also includes trend (and momentum) as well as price patterns.

S&R becomes more important when multiple levels are clustered roughly in the same area. For instance, a S&R level becomes stronger when a Fibonacci level, weekly Pivot Point, trend line, and Admiral Keltner channel (part of MetaTrader Supreme Edition) line up at about the same point.

It is important to choose a couple of S&R tools rather than use too many. Otherwise, the only thing you see on the chart will be S&R levels, which defeats the purpose.

It is important to follow the following two steps: first, find the S&R tools that work best for you; second, look for confluence.

Tip #4: Use Divergence Patterns

Reversals become more likely when price momentum slows down. Traders can assess momentum strength or weakness by comparing high lows both on the price and the oscillator (watch the video below for more information about reading divergence):

  • The presence of divergence increases the probability of a reversal, but is not a guarantee;
  • The lack of divergence makes it more likely that the a trend continues.

There are a couple of important factors to consider when reading divergence:

  • The higher the time frame, the more impact divergence will have on the price;
  • Multiple divergence is a stronger signal than single divergence;
  • Use divergence in confluence with other reversal signs because the price is able to continue with the trend for a while despite divergence.

Tip #5: Use Chart Patterns

Last but not least, chart patterns are critical for understanding the psychology behind the price movements. Why? Because traders can assess the price flow and movement with deeper understanding.

For example, a bull flag chart pattern informs traders that the price is building a mild bearish correction within a larger uptrend. Traders can try to trade the continuation once the price breaks above the flag pattern. The opposite is true for a bear flag chart pattern.

The flag examples are actually trend continuation patterns, but there are also multiple reversal chart patterns available, such as:

  • Head and shoulders (bearish reversal);
  • Inverted head and shoulders (bullish reversal);
  • Rising wedge (bearish reversal);
  • Falling wedge (bullish reversal);
  • Double top (bearish reversal);
  • Double bottom (bullish reversal);
  • Triple top (bearish reversal);
  • Triple bottom (bullish reversal).

All in all, confluence and patterns are critical aspects when analysing the charts and spotting reversals. The five points mentioned above should help out with trading reversals, but remember to practise first!

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TrendLine WPR Reversal Forex Trading Strategy (7357)

High accuracy “TrendLine WPR Reversal Forex Trading Strategy” – A trendline is probably the most basic tool in the technical trader’s toolbox. They are easy to understand and can be used in combination with any other tools you might already be using.

By definition, a trendline is a line connecting two or more lows or two or more highs, with the lines projected out into the future.

If drawn correctly, they can be as accurate as any other method.

  • Time Frame: M5 or higher
  • Currency Pairs: Any
  • Vertical line Moves with Price
  • Williams’ Percent Range
  • Download TraderVersity.Com-TrendLineWPRReversal (Zip File)
  • Copy mq4 and ex4 files to your Metatrader Directory …/experts/indicators /
  • Copy the “TraderVersity.Com-TrendLineWPRReversal.tpl” file (template) to your Metatrader Directory …/templates /
  • Start or restart your Metatrader Client
  • Select Chart and Timeframe where you want to test your forex system
  • Right-click on your trading chart and hover on “Template”
  • Move right to select TraderVersity.Com-TrendLineWPRReversal
  • You will see “TrendLine WPR Reversal Trading System” is available on your Chart

The very first thing to know about drawing trend lines is that you need at least two points in the market to start a trend line. Once the second swing high or low has been identified, you can draw your trend line.

Here is an example of the first two swing lows that have been identified.

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  • Use a demo account or a small live account first to practice this trading system

Notice in the chart above, we have two main points at which we can start to draw our trend line.

There are three very important keys to drawing effective trend lines.

  • The higher time frames will always produce the most reliable trend lines, so start there and work your way down
  • Most trend lines you come across will have some overlap from the high or low of a candle, but what’s important is getting the most touches possible without cutting through the body of a candle
  • Never try to force a trend line to fit – if it doesn’t fit the chart then it isn’t valid and is therefore not worth having on your chart

This “TrendLine WPR Reversal” method can help you spot potential reversal points in the market.

At this point in the lesson, you know that a trend line can be used to identify potential BUYING or SELLING opportunities. But this only works as long as the market continues to respect the trend line as support or resistance.

This is where you have a chance to trade a market as it makes a turn from a major swing high or low. Below is an example of a market that broke trend line resistance.

This gave price action traders an opportunity to buy the market easily.

This is a great way to use trend lines to spot potential reversals in the market. It is without a doubt one of the best ways to catch a big move as a market changes direction.

  • Price break trend line resistance
  • Williams’ Percent Range: Upward and above level -45
  • Price break trend line support
  • Williams’ Percent Range: Downward and below level -55

How to Spot and Trade Downtrends in Any Market

Most people seek out investments where the price is rising, or about to rise. This style of trading attempts of profit from an uptrend in the price. Yet money can also be made when asset prices fall, called a downtrend. This is accomplished through short-selling. Being able to spot a downtrend saves you money–it tells you to get out of assets you previously purchased, so all the profits aren’t eroded by the falling price.

This article will focus on the price structure of a downtrend, what events cause downtrends to reverse, and how to trade a downtrend.

Price Structure of a Downtrend

A downtrend is composed of two types of price waves: impulse and correction. If a stock drops from $10 to $9.50, rallies to $9.75 and then falls to $9.30, each of those three movements is a price wave.

Impulse waves are larger: $10 to $9.50 and $9.75 to $9.30. Corrective waves are smaller: $9.50 to $9.75. This is how trends are created, and how the price makes progress in one direction or the other. If there is an impulse wave down, followed by a corrective (smaller) wave up, then the price has made overall progress to the downside. The downtrend continues as long as impulse waves occur to the downside and smaller corrective waves occur to the upside.

The attached chart shows a downtrend. The candlestick chart of the EURUSD forex pair shows the price declining in waves. Another way to think of a downtrend is that it’s a sequence of lower highs and lower lows. Moving from left to right on the chart, the impulse waves each reach a lower price than the last impulse, and the highs of each correction also move down.

What Reverses a Downtrend

If a downtrend is a sequence of lower highs and lower lows–or impulse waves to the downside and smaller corrective waves to the upside–a reversal is when those criteria are violated.

If the price makes a higher high or higher low, that signals the downtrend is in trouble. For example, the downtrend is in trouble if an impulse wave occurs to the upside and is followed by a smaller down wave (higher high, higher low).

Trend traders adapt to new information as it comes available. The price may move into a downtrend, give a signal the downtrend is in trouble, but then revert to a downtrend again. Or the price could move sideways or into an uptrend. No matter what the scenario, isolating which direction the impulse waves are moving gives you the trend direction. If up and down impulse waves are the same size, then the price is moving in a range (sideways).

When impulses are to the downside, favor short-selling on upside corrections. When impulses are up, favor buying on the corrections lower.

Trading a Downtrend

Trends, both up and down, occur across all time frames and all assets. Trade them on short-term charts (tick and/or one-minute charts) and/or over long-term time frames (daily, weekly and monthly charts). The same trend trading concepts apply when looking at a one-minute chart or weekly chart. If viewing a one-minute chart, trades are taken to capture small trends lasting hours (rare), minutes or even seconds. On a weekly chart, traders seek trades that could last months or years.

Once a downside impulse wave occurs (a move lower larger than the prior up waves) it’s possible a new downtrend is starting. Therefore, when a correction to the upside develops it likely won’t rally all the way up to where the impulse wave started (because corrective waves are smaller). Plan on short-selling during that corrective wave, based on the assumption that the price will have another impulse wave lower.

There are multiple techniques for entering a trade during a corrective wave. Fibonacci retracement levels help isolate areas where the correction could stop and reverse. Another method is to wait for the correction to stop rallying, let the price move sideways and when it starts to drop again enter a short trade. Examples of this strategy are provided in How to Day Trade Stocks.

Place a stop loss on each trade to manage risk, and have an exit strategy for taking profit. During a downtrend, ​the assumption is that the price will make a new low. until it doesn’t. Therefore a target, in order to exit a short trade with a profit, is placed near the former low. In a very strong downtrend (big impulse waves) the target is placed below the prior low. In a weak downtrend (impulse waves barely bigger than corrections) the target is placed just above the prior low.

Final Word on Downtrends

A downtrend occurs when larger waves (impulses) occur to the downside, and smaller waves (corrections) occur to the upside. During downtrends consider short-selling during the correction–technical tools and strategies help isolate when a correction may be ending. Utilize a stop loss order to control risk, and also plan for how to exit a profitable trade, likely using a price target.

What’s the most reliable way to spot a trend reversal in the stock market?

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What’s the most reliable way to spot a trend reversal in the stock market?

If you can see supply and demand imbalances on any price chart on any time frame you’ll be able to tell with a high degree of certainty where price action will turn and turn. Once you are able to see these supply and demand value areas you will have an edge over your competition and be able to make an unlimited amount of money depending on your capital base.

The best way to see these supply and demand value areas is to use MTFA (multiple time frame analysis). If you work from a daily chart you can use the weekly and mo.

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