Trend reversal trading strategy

In fact, the Donchian Channel is grounded with price action. The Donchian Channel has two lines. They are the highest price and the lowest price attained within the lookback period.

This means that it is simply defining a price range using historical price action. Refer to this free PDF for a detailed explanation of the Turtle trading approach. As a trend strengthens, two moving averages of different periods will diverge. As a trend weakens, two moving averages will converge. For trend traders, an impressive use of the MACD is for finding price divergences. A price divergence is a powerful reversal signal. It occurs when price and an oscillator disagree.

Technically, you can define a price divergence with two points. However, using three points like in the example above improves the quality of the setup. However, as they do not relate to price action directly, they tend to give early signals that might be less reliable. Nonetheless, when used correctly, they give the trend trader a chance to enter the market before everyone else.

OBV is a cumulative indicator. It means that its value does not depend on a lookback period. It increases and decreases according to the polarity of each price bar. The key implication is that you should ignore its values, and focus on its direction. If both price and OBV are rising, the bullish trend is solid. Once the OBV starts to lose steam, a trend trader might sense danger. A reversal might be impending. I like to observe the OBV through a long-term moving average of its values. A moving average helps to highlight the trend of the OBV, which is as important as the trend of the market.

In the example below, the background colour shows the slope of the OBV moving average. To learn more about trading with OBV, take a look at this article. The Volume Oscillator is a handy tool but you must be careful. Positive values do not mean that bullish prices are supported. They mean that the trend, in either direction, is healthy. Negative values mean that the trend is weak. Using the Volume Oscillator well is more challenging than applying price oscillators. Practise more and you will be well-rewarded with a volume perspective to price action. In a rising trend, sudden extreme high volume might be the result of climatic buying.

Climatic buying implies that all the buyers have bought. When there are no buyers left, the market can only go one way — down. The same logic applies in a falling market. Climatic volume might have taken out all the sellers. You can spot extreme high volume bars in retrospect easily. However, in real time, you might hesitate in deciding how high is high.

To solve this problem, you need a more objective method to determine if volume is high. One way is to use Bollinger Bands applied on volume data — orange line in the chart below. Extreme high volume also helps to define reliable support and resistance levels. As a trend trader, you appreciate the importance of reliable reversal signals. Instead, learn to use them prudently with price action as your beacon.

While no tool is flawless, you can use them to your advantage. For instance, you can put on a small position based on the anticipation of a reversal. Then, increase to your full position once the reversal is confirmed.

An Example of determining a Trend Reversal Using Technical Analysis Patterns

Spotting reversals is one of the toughest but most rewarding trading approach. This is why a trend trader needs the best tools available. Hello, may i know what platform was use for this little benefiting tutorial. I use NinjaTrader for all my charts. You can learn more about it by clicking here.

This is, undoubtely, one the best ever. I use Ninja been trading for 18yrs or so. Great, great, great Stuff! Whenever something is repeated 2 or 3 times in a row signifies the importance of the matter.

Hello Bill, thank you for your comment. I tried observing the Lower Band for low-volume signals but that did not produce any helpful insights so far.

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When the market finally went below the resistance level, we go Short at the close of the candlestick. Now that you know the reversal patterns in an uptrend, identifying the reversal patterns in a downtrend is basically just a mirror image. If you have no problems identifying a reversal pattern in an uptrend, you will have no issues identifying reversal patterns in a downtrend.

Similar to trading double tops and higher highs, we enter into a Long trade using these 3 methods:.

Since trading the double bottoms and lower lows are just the exact opposite of double tops and higher highs, I will just go through the chart examples to show you the trade entries. It immediately formed a Bullish Engulfing Pattern in the next bar and this signifies that the support level is strong. Go Long either at the close of the Bullish Engulfing Pattern, or wait for a retracement to the midpoint of the candlestick.

Again, you can either go Long once the candlestick closes, or wait for a retracement back to the midpoint of the candlestick. On the left-hand side of the chart, the market formed a lower low and the stochastic indicator is forming a higher low indicating a divergence. For a conservative entry, wait for the market to close above the 50 EMA and retrace back to the halfway point of the whole move up.

Like V-Tops, V-Bottoms are price spikes in the market mostly because of news, manipulation, or technical breakouts. In the chart above, the market formed a Bullish Pin bar a few bars after breaking below the previous swing low. However, the candlestick that closed above the Bullish Pin Bar was not above the previous swing low. The reason I did not tell you where to place your Take Profit level in each of the reversal patterns is because every trader has their own trader style.

So instead of telling you where to place it, I will give you a few strategic places to place your Take Profit level. If you see a double bottom formed and all the stars have lined up telling you to go Long, how can you know whether it has a good chance of working out? Although we are trading reversals, we want to be trading in the same direction of the bigger timeframe.

We are trading reversals.

Trading against the trend is the whole idea of reversals! So although we are trading reversals, we are trading reversals on the smaller timeframe which serves the bigger timeframe. Now, imagine that the same double bottom appeared on your minute chart for two different currency pairs. That means if the bigger timeframe is in an uptrend, then we only want to look for Long reversals in the smaller timeframes.

And if the bigger timeframe is in a downtrend, then we only want to look for Short reversals in the smaller timeframes. So do tell me in the comments below — which of the reversal patterns do you have success with at the moment? So go ahead, click the share button below now to help more traders get an Edge trading the Forex market. Who am I? On this blog, I will be sharing with you everything I've learned along the way to make you a more successful trader in the markets, and more importantly, help you create an edge trading the forex market :. Your email address will not be published.

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