The danger of trading reversals is simple: trends tend to push further than most traders anticipate. Ultimately revenge trading is around the corner when a reversal trade fails because the trader could attempt the same setup at a new spot.
This process could repeat multiple times until a trader finally gives up in desperation after having a streak of losses on what is essentially the same setup… of course it is “Murphy’s Law” which dictates that at what point the currency pair finally could reverse (not always though).
My best advice when trading reversals is:
- Allow yourself only one shot of trading the reversal. Do not attempt to trade the same setup multiple times and see your account disappear just because of your disagreement with the market (is valid for all trading in fact);
- Do not underestimate the trend. Realize that consolidations can last long and ultimately price often uses it as a base for further trend continuation (see chart above). This process could be pared with ugly spikes before a trend persists;
- Wait for multiple confirmations and confluences. Before trading a reversal make sure that multiple tools and indicators confirm and provide a confluence. Often a single reversal indication will not be sufficient to provide for a winning trade;
- Be realistic with the target for the reversal. It’s a fact that smaller reversals occur more often than bigger ones. Big reversals only occur every so often. Planning for a big reversal could pay off tremendously, but realize that aiming for smaller targets will often be more realistic and lead to a decent win percentage.
EURAUD REVERSAL SETUP
Keep the above pointers in mind when I review the EURAUD daily chart and show a potential reversal trade setup. Here are some of the most important elements for this analysis:
- Price has reached the most important Fibonacci target: the -61.8 level. Price has a very tough time to extend past this target without making some type of correction first (reversal or consolidation);
- Price is showing a candle stick reaction to the -61.8 target: a bearish pinbar. The daily candle is a big time frame candle and it has a sizeable wick on the candle top. The close is bearish as well.
- The pinbar is occurring after a long uptrend which lasted 20 days. Could the pair be overstretched? Yes this would certainly not be a strange moment for price to make some kind of reversal to the mean.
The above points are showing confluence but of course you can use or add more yourself.
TRADE SETUP EURAUD
I have now identified a potential trade setup but the next step is even more crucial: will I trade it and if yes, then how? Obviously the trigger can vary from setup to setup, so what could be my trigger for the EURAUD?
The EURAUD is in a bullish trend channel and price has reached the bottom of it. This could therefore easily be a bullish bouncing spot. Tweet This
The probability of making money with a short is not so favorable at this spot. But the dynamics change if one of the following 2 events occurs:
- If the price reaches the resistance Fibonacci levels and shows a candle stick pattern at the Fib levels;
- If the price breaks below the support trend line and invalidates the bullish channel.
Reversal targets are at the -27.2 (1.5065), -61.8 (1.50), and -100.0 (1.4914).
Both triggers make sense and offer a method for traders to trade the reversal. Just be aware that trading reversals always have their uncertainties but if the trader avoids revenge trading and keeps risk under control (via risk management) then all should end well regardless of the outcome of this setup.
What do YOU think of reversals?
Are you interested in trading the EURAUD reversal setup?
Winner’s Edge Trading, as seen on: