Friday, May 18, 2007

Detecting trend reversal on Forex

I know that: "How to detect trend reversal?" maybe a thought question with very complex answer but I will try to make my take on it, and keep it very simple and understandable.

So let’s get started, obviously when trying to detect trend reversal on Forex you have to use tools that were designed for it. You can’t predict it with MACD or RSI because they are trend following indicators. Indicators designed to predict trend reversal are … candles. Japanese always traded reversal strategies, European and US traders are almost always trend following traders.


If you don’t know how to interpret forex candles then do a search on web and find some info, reading correctly candles is easy and you have to know it. Although keep in mind I do not recommend using them on charts smaller then 4H.


Of course … relying only on Japanese techniques can be quiet deceptive so we need something more reliable, we need to have an angel. Trend reversal candles can happen anywhere on the chart, will they always mean end of the trend? … No, the really important candles are those which can be found near support and resistance levels. We want to know if this particular level will be broken or not.


Let’s pretend we have reverse candle near support, is it time to buy some lots? Again the answer is NO. Take your time, the next candle should be white which is confirmation that trend was reversed, there can also be consolidation period near resistance level, which is usually another sign that trend is reversing, in this case I would put long order at the resistance of consolidation block.


Where to put stop loss? I put it about 100 – 200 pips below my order depending on situation. I mean if important resistance or support line is broken and price move fast in opposite direction (eg. 100 pips) then there is really no point in holding this position any longer, trend wasn’t reversed.


Well, I hope this helps some of you, but if you are going to use this techniques then keep in mind they apply to longer timeframes! I use it with 1D charts, if you will use it with 15M chart you are going to blow yourself out.

10 comments:

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POO said...

Hi, thanks for very good article.

I have a question regarding your article. Let say, I'm using D1 chart to watch the reversal pattern, then what is the suitable Support & Resistance level to refer? Should I use Pivot Point and what's the suitable timeframe for it?

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Learn to Trade Forex said...

When the chart is making higher high and higher lows, that means that the trend is up.

On the contrary, when the chart s making lower lows and lower highs, again it indicates that the trend is down.

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