Learning how to identify reversals in Forex trading is a profitable strategy that can increase your profits. If you know how to identify reversals, you will benefit from timely exiting trades before your profits are eaten up by the market and also you will be making some cool profits on trades taken in the direction of the reversals.
There are several ways you can use for identifying reversals. First, is to look for significant resistance and support levels. And, if these levels are broken convincingly, then a reversal could be brewing up. Second, is to use trend lines. It is of essence to note that the initial clear-cut signal that the trend is culminating is usually the failure of a trend line. If price breaks and convincingly closes above or below a trend line, then it might be an indication of an imminent reversal.
Next is to use candlestick patterns. There are candlestick patterns that usually give signals of impending reversals, and some of them are tweezers top or bottom, morning or evening star, hammer, engulfing pattern, and double top or bottom. These patterns are normally formed when traders realize that the market’s trend is changing and then they place trades in the direction of the reversal.
Another way of identifying reversals is to use moving averages. When you plot a short term moving average and a long term moving average on a chart, you can use the points of their crossover as a sign of reversal. When a short term moving average cuts above or below the long term moving average, it normally indicates that a reversal may be coming.
Lastly, various oscillating indicators such as RSI and Stochastic are normally used in identifying reversals when trading currencies. Mostly, oscillating indicators are used to confirm if there is a reversal or not. For example, if there is an impending reversal in an uptrend, the indicators usually show oversold conditions. And, if it is true that it is oversold, you can wait for the indicator to start pointing down before placing your order. On the other hand, if there is an impending reversal in a downtrend, you should do the opposite.
In identifying reversals, it is important note to use one method in seclusion. Combining two or three methods can be very helpful. And, it is better to identify reversals in the higher time frames so that you can boldly place your trades in the lower time frame.