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Just started trading 3 months ago. Can you guys share some of your methods on spotting reversals? Thanks |
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Hi asop,
Your question is a commonly asked question on the internet among traders and there are many free resources online that can be easily researched via something like Google in which you will find in-depth explanation of what someone calls a "trend reversal" pattern.
Further, there's a difference between trend continuation, trend reversal and counter-trend signals. Many traders get trend reversal and counter-trend price action mixed up as if they are the same.
In fact, most of the traders I've met that had problems with trend reversal trading (change in volatility with a reason/event for the change) where actually counter-trend trading (no change in volatility and there's no reason/event to signal the change).
With that said, consistently profitable trend reversal traders understand there's more to it than just the pattern signal.
First of all, the best trend reversals are the ones that have a reason (market event) that's none technical and our pattern signals are just confirmation to these market events so that we can try to get the best entry possible into these
market event trend reversals.
For example, the market is moving upwards between 0930am est to 0959am est...up 3 points and then when a 10am est Economic Report is released the price action suddenly reverse direction.
If your lucky and your pattern signal confirms an entry into such a price action...this would be a
market event trend reversal while your pattern signal confirmed an entry into such a price action.
Simply, your pattern signal that's labeled as a trend reversal signal does not tell you the market will reverse...
It has
confirmed to you the market has reversed and given you an entry signal into that
market event trend reversal.
How far it will continue in the new direction is another story.
Secondly, there's also a trend reversal that occurs for technical reasons and these are either associated with the following:
* Price Action changes in other Key Markets that have a direct impact on the price action in your trading instrument.
Basic aspects of
intermarket analysis.
* Volatility Divergence within your trading instrument that can be measured by comparing one WRB (wide range body) to a prior WRB (wide range body) in your trading instrument.
One of the easiest ways to began studying volatility changes is to recognize volatility that is contracting (smaller price ranges) and expanding (larger price ranges especially when they occur as range spikes in comparison to the most recent small price ranges).
It's from these volatility changes that many of today's trend reversals are derived (Japanese Candlesticks, Double Tops/Bottoms, S/R Levels, Pivot Points, Volume Analysis, Common Chart Patterns like the Wedge and many other names you may see used at different websites or forums).
My point is if you concentrate of learning about
volatility itself...it will open the door and bring to light all those other trend reversal methods you've heard about.
Reason why there really is not majic forumula nor secrets to spotting reversals.
It begins with understanding why reversals occurs and the rest of the journey down that road will lead you to whatever reversal method is suitable for your needs even though it may not be suitable for someone else that's using a different reversal method although the change in volatility is the same regardless to the different trend reversal method that gets labeled to a particular point on the chart.
As you can see from the above, I prefer to concentrate on what's causing the price action to do what it is doing prior to getting into the actual pattern signal.
It's not a perfect approach to the market (I do have losing trading days) but I prefer to first turn the light on to see what exactly I'm crawling into bed with.
Mark
(a.k.a.
NihabaAshi) Japanese Candlestick term
"Volatility Analysis is a doorway to consistent profits."