Thursday 26 November 2020
Sunday 15 November 2020
How To Spot Reversals In Forex
A Forex Reversal is the bouncing of price to a different direction; providing opportunities for traders to enter the markets...
Reversals are areas on a chart where the price of the market bounces from the direction it has been
moving in and then moves in the opposite direction.
Traders look for areas where this might happen, before it happens, to then profit from the move in the opposite direction.
Here Is A Youtube Video That Takes You Through 3 Awesome Methods To Easily Spot Reversals…
This is a deceptively simple concept because it can be very hard to correctly identify where a
Forex Reversal will take place.
So I have some methods for you that will help you To Spot Reversals In Forex...
Support and resistance Levels
Support and resistance levels are levels on your chart where price has bounced off or reversed several times before.
As it has bounced off these levels in the past, if price now reaches one of these levels again
then price may well bounce once more and traders can capitalise on the bounce
When I draw these levels I differentiate between monthly strong levels (red Line), weekly
medium levels (Blue Line) and daily levels (black line).
If price has reached a monthly level it is more likely to bounce off that level than if it has
reached a weekly level and, conversely, if price has reached a weekly level it is more likely
to bounce off that level than if it has reached a daily level
This is important because it helps you decide if the point at which price is at is likely to be
a place where the price will reverse.
If price is at a monthly level for example it is more likely that the price will bounce off this
level than if price has reached a daily level.
Trendlines
Trendlines are a sloping form of support and resistance levels and work in conjunction with
horizontal support and resistance levels.
Trends are either uptrends or downtrends. In order for an uptrend to be valid it must have
created 2 higher highs and 2 higher lows.
In order for a downtrend to be valid; it must have created 2 lower lows and 2 lower highs.
A trendline is then drawn on.
In an uptrend; the trendline is drawn below the trend and must join the 2 higher lows. Traders
will then look for the price of the market to move back or retrace towards the trendline. Once
price reaches this point it is a first indication that price may bounce off this level and traders
will look to place a long trade that will profit from the potential following bullish price action.
In a downtrend; the trendline is drawn above the trend and must join the 2 lower highs. Traders
will then look for price to rise back to the trendline, again as indication that price may bounce
from this level and they can place a short trade which profits from potential following bearish price
action.
Fibonacci Levels
The Fibonacci indicator is used in a trending market where it has, by far, the greatest effect.
There are 5 main levels which are the 23.6% level, 38.2% level, 50% level, 61.8% level and
the 76.4% level.
In an uptrend, the Fibonacci indicator would be drawn from the most recent higher low to the
most recent higher high. You would then drag across your screen so that the levels cover your
chart.
You can see above that the levels appear when you do this. From this point traders would be
looking for price to retrace back to one of these levels. When price comes back and looks like
it is stalling at one of these levels, this could be an opportunity to enter a long trade and profit
from the potential following bullish price action.
In a downtrend, the Fibonacci indicator is drawn from the most recent lower low to the most
recent lower high. Once again, drag the indicator across your screen so that the levels cover
your chart.
From this point traders will look for price to retrace back up and stall at one of these levels. This
could be an opportunity to enter a short trade to profit from the potential following bearish price action.
Combine The Indicators Together
The great thing about this and the other 2 indicators is that they can be combined together. If, for
example, price has retraced to a support and resistance level and is stalling, it could be a good place
to enter a trade. But, if you combine the indicators and also find that price is on a trendline and a
Fibonacci level then this increases greatly the likelihood that price may reverse from the point you
are looking at.
As you can see above; not only has the market retraced from a higher high to a weekly support
level (coloured blue) but this also coincides with the ascending trendline.
If we also add on the fibonacci indicator we find that price is also hovering around that 76.4% level.
If we get further confirmation that price is about to reverse then this could be a good place to enter
a trade.
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Until next time...