How To Identify Reversals in Forex

As an FX trader, your eyes and ears should always be open because price movements change constantly. Holding a trade for too short or too long might result in significant losses, so you need to know when to chip in and exit. 

Unfortunately, the FX market is the most volatile one, so you can never really know how it may shift. However, this is where trend reversals come in handy. Read this post where we give you some way in which you can spot an FX trend reversal and increase your income.

What is an FX Trend Reversal?

Trend reversal in FX signifies the change of an asset’s price direction. Like when a currency that went upward has suddenly started going downward, or vice versa.

Reversals can happen in a few years, months, or days. However, intraday reversals are most common. 

A reversal’s time frame is essential. For instance, an intraday reversal on a 15-minute chart is not alarming for a long-term trader but can be critical for a day trader.

Even though reversals seem like pullbacks when they start, these two are not the same. A reversal is a long-term trend change, while the other is a countermove that that’s part of the trend.

Why are Trend Reversals Important?

A trend reversal can be highly profitable if you know how to turn it to your advantage. Noticing a reversal in a downward trend can help you invest in assets that will become more profitable in the future. On the other hand, spotting a reversal in an upward trend can inform you whether it’s time to exit a trade. 

If you want to make the most out of your reversal spotting, choose professional online brokers who provide extensive charts and technical indicators. To find which firm offers the trend reversal tools you need, compare forex brokers on Brokersview.  

How To Spot an FX Trend Reversal?

Nobody can look into the future. However, traders can use various tools to estimate currency changes and reversals. Here are the best FX indicators for making forex trend reversal predictions.

Candlestick Patterns

Many brokers use graphics to help traders interpret price action. The most common visual display is the candlestick chart. It comprises tiny candle-like boxes that show low, high, close, and open values in upward and downward sessions. 

The candlesticks form configurations that inform traders about the current and past price action. The candlestick chart most probably points to a reversal if it has one of these configurations:

  • Hammer
  • Shooting star
  • Bullish and bearish engulfing
  • Doji pattern

Chart Patterns

A more traditional approach for predicting reversals is fishing for chart patterns. With this method, you need to identify what type of patterns the chart forms overall. Some common chart patterns that point to a reversal are:

  • Double top and double bottom
  • Head and shoulders
  • Dragon
  • Triple top/bottom
  • Falling wedges
  • Inverse head and shoulders

Divergence 

Sometimes in upward trends, the chart’s high and low points differ from what the indicator shows, i.e., the price may be rising, but the indicator goes down and vice versa. This is known as divergence. 

Divergence signifies that the chances of a trend continuing in the same direction are smaller. However, that might retract and continue in the previous direction or completely reverse. So one should be especially careful if they notice divergence. 

Volume

Another way to identify reversals is by looking at volume. By volume, we mean the number of trades made during a specific time. For instance, if more traders suddenly start buying or selling assets, they’ve most probably spotted a reversal.  

You can use this technique to establish the accuracy of your observations. If you have spotted a downward trend but don’t see it reflected in volume data, this indicator can help you reevaluate these findings, especially if you are a new trader.

Trendline

A simple way to spot a reversal is by drawing trendlines on the chart. Traders draw the lines under pivot lows or over pivot highs. The goal is to connect multiple price points and visually summarize the price’s direction and movement. 

A trendline will show support and resistance, direction and speed, and patterns during contraction. If it’s smooth, the trend is going in the same direction, but if there is a slope, a trader might consider taking action. 

To Conclude

The methods mentioned above are not the only ways to spot a reversal; they are the easiest and more common ones. Other methods include the Sushi Roll technique, TRIX Crossover, and Profit Ratio. 

To get the best results, you can apply multiple techniques at once. Take specific trading actions only after most of your observations and research point to a reversal. After all, trading is all about taking calculated risks.