Identifying Trend Direction Reversal
The trend reversal movement is often referred to as a reversal. Let us distinguish between retracements and reversals appropriately. It’s possible to be able to reduce the amount of trade losses and even make you win in some trades.
Classifying price movements as a retracement (correction) or reversal (reversal) is very important. There are some major differences in distinguishing price changes while the retracement from a long-term trend reversal.
- Usually occurs after a very large price movement
- Short-term and short-term reversals
- The fundamentals (ie, the macroeconomic environment) are NOT changing
- In an uptrend, buying interest is present, thus making the price rally. In downtrend, selling interest is present, making the price down.
- Can happen anytime
- Long-term price movements
- Fundamentals change, which is usually a catalyst for long-term reversals
- In an uptrend, there is little buying interest that forces prices to fall lower. In a downtrend, there is little selling interest that forces further price increases.
There is a tool that can be used to measure the retracement that is using Fibonacci retracement. A popular way to identify retracements is to use Fibonacci levels.
For most price movements, price correction persists at Fibonacci retracement levels of 38.2%, 50.0% and 61.8% before continuing the overall trend.
If the price exceeds this level, it may signal that a trend reversal (reversal) occurs.
Technical analysis is not an exact science, which means nothing is certain. Especially in the forex market.
Another way to see if there is a reversal is to use the pivot level.
In an uptrend, the trader will see a number of lower support levels (S1, S2, S3) and wait to get down.
In downtrend, the trader will see higher resistance (R1, R2, R3) and wait until penetrated.
If a break occurs, a reversal may occur.
The last way is to use trend lines. If the main trend line is broken, a reversal may occur.
By using this technical tool along with the candlestick chart pattern that has been discussed earlier, forex traders may be able to get the probability of a high trend reversal direction.
Although this method can identify reversals, it is not the only way. However, nothing can replace practice and experience.