Trading reversals requires a first-class timing during entry and exit, otherwise the market just continues trending against your position and the trade closes as a loss. Although trading reversals has its riskier side, at times, reversals truly offer excellent value for your money.
The best reversal trades occur when a trader is trading WITH momentum. When a thrust occurs, it has the ability to launch price in one direction consistently regardless of the trend.
The Strike Trader does a great job of trading with momentum. For instance in yesterday’s article I mentioned a ‘with-the-trend’ long on the AUDCAD which ended up as a loss. In retrospect many things could explain it, but the interesting fact is that the Strike Trader was impeccable in catching the bearish momentum.
Besides momentum there are also other tools and indicators which aid a FX trader with establishing high probability reversal zones: candle stick patterns, divergence on an oscillator, the presence of support or resistance from a higher time frame, Fibonacci levels, trend line breaks or any confluence of tools.
ANY REVERSAL SIGNALS THIS WEEK?
In today’s Forex market I am keeping an eye on the Canadian reversal, specifically the GBPCAD. There is an expanding wedge on the daily chart (blue lines) and I am interested in shorting the pair when price reaches the resistance confluence, which I consider to be the following things:
- The top of the expanding wedge (blue lines);
- The -61.8 Fibonacci target (orange Fib);
- The resistance trend line (red line);
- The start of the bearish momentum and current top (light red line).
A pending entry at the Fib target with a 50-100 stop loss should in most cases suffice, but the accuracy of the entry and stop loss increases when a bearish candle stick pattern is observed at the entry zone.
Even if a candle confirmation is seen, it is wise to place the stop loss 15 pips or more above the candle high – just to give a bit more extra space.
Multiple targets make sense such as aiming for the 1.80 round number, aiming for the bottom of the wedge, or perhaps a bigger reversal could take place. How far price can reverse ultimately depends on whether the weekly chart is reversing or just accumulating for a bullish break (see purple lines below in screenshot).
The concept of chart patterns is also valuable for catching reversals. For instance, the AUDNZD had a triple top (thick red) and perhaps some of you took the short.
At this point the only reversal setups which make sense and are worth taking are at the bottom and top of the wedge or the armpit levels (purple lines). Considering the current bearish momentum a bounce off of the bottom seems most likely for a bullish setup.
A bigger bearish reversal breakout could only occur in case price manages to break through the neck line (orange) of the triple of the top. Always check for momentum and candle stick confirmation to avoid getting trapped in false breaks.
What reversal setups do you see?
Wish you Happy Hunting and thank you for sharing this post!
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