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Different Ways To Spot Reversals In Forex Trading

By Dave Norman

When watching forex price action, traders are mindful of reversal signals, which would allow them to catch big price moves in a single direction. Tops and bottoms can be identified using various methods and analyzing forex trading charts before a trader takes a swing position and takes advantage of the whole price move. There are three main methods to identify reversals in forex:

One way to pinpoint reversals is to watch chart patterns. These formations typically result in strong price reversals when the confirmation signals are given. For example, the double bottom chart formation is formed while price is on a downtrend but it suggests that an uptrend is about to take place. A double top chart formation is created during an uptrend and it hints that a potential downtrend will happen. Another example of reversal chart patterns is the head and shoulders, which is formed during an uptrend and hints at a potential downtrend. Conversely, an inverse head and shoulders pattern is formed during a downtrend and points to a potential uptrend. However, these patterns are only confirmed as reversal signals when the neckline is broken by the price.

Second, candlestick patterns are also useful in identifying possible reversals when used in longer-term charts. The best kind of reversal candlestick pattern is the doji, which is formed when the candle’s closing price is equal to its opening price. Another kind of candlestick that hints at an upcoming reversal is the spinning top, which has a small body and long wicks. In an uptrend, a hanging man formation is a sign that a downtrend could take place afterwards. In a downtrend, a hammer candlestick is a hint that an upend is about to take place soon.

Lastly, technical chart indicators are also useful in identifying reversals. Momentum indicators or oscillators can both be used, although it could lead to better results when they are used in tandem. As an example, stochastic in the oversold region shows that the selling pressure is exhausted and that an uptrend might take place. Stochastic in the overbought region shows that buying pressure is overdone and that a selloff might happen.

Combining these three kinds of reversal spotting methods can help increase the odds of being right, especially when the parameters are correct.

Find out more about trading reversals.

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Article Citation
MLA Style Citation:
Norman, Dave "Different Ways To Spot Reversals In Forex Trading." Different Ways To Spot Reversals In Forex Trading. 17 Apr. 2014. uberarticles.com. 2 Aug 2014 <http://uberarticles.com/finance/different-ways-to-spot-reversals-in-forex-trading/>.

APA Style Citation:
Norman, D (2014, April 17). Different Ways To Spot Reversals In Forex Trading. Retrieved August 2, 2014, from http://uberarticles.com/finance/different-ways-to-spot-reversals-in-forex-trading/

Chicago Style Citation:
Norman, Dave "Different Ways To Spot Reversals In Forex Trading" uberarticles.com. http://uberarticles.com/finance/different-ways-to-spot-reversals-in-forex-trading/


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