By Sophia Todorova– FX Storm
Trading reversals in Forex can be quite profitable. It can, however, seem a bit daunting at first. If used properly, it can be a great addition to your trading arsenal. Once you become aware of what to look for, you will be able to recognize them quite easily and take advantage of them.
There are different types of reversal, but for the purpose of this article I’ll go through the simplest one. As you will imagine, they occur on all timeframes. If you see a crown set-up on a smaller time frame (less than 4hr), you have a higher probability of it being profitable if you trade it in the direction of the main trend. Traded this way, it can be a great confirmation of trend continuation. However, generally speaking, if I am trading a reversal on a time frame higher than the 4hr, then I’d expect the trend to change for a few days at least.
I will highlight the 4 main steps involved in a reversal set-up, and I have included a 4hr chart of a reversal trade I’m currently in, for reference:
1. What I call the peak is the last dip or rally the pair makes before it reverses.
2. Next is the breaking of the trendline, which is the most critical step of the reversal pProcess.
3. In this step refer to the chart to see how the candles tested the trendline repeatedly to try to find some selling interest. The trendline once resistance, now acts as support. This is where you would enter buying, with your stop loss below the lows. You can see them clearly on the 4 hr timeframe.
4. Price rallies off of support, thus confirming the reversal. I entered this trade based on it being a daily reversal, so my targets for profit are going to be just before the market hits major areas of resistance on the daily timeframe.
This second chart I have attached, is where the price is at 3 hrs after I began writing this article.
Reversal trading is profitable simply because you are getting in at the very beginning of the start of a trend. By trading several lots, and locking in along the way, or scaling out, as the case may be, typically, you will be able to hold the position for a while.
It takes patience to wait for the appropriate set-up and the reversals do sometimes fail. However, on the whole, with proper money-management applied. You should do quite well.
If you are attempting it for the first time, I suggest you either demo trade it at first, or trade it on a micro account until you become competent at trading it.
As always, ‘till next time, trade confidently!
One other note: When trading make sure that you keep aware of the news that comes out and a great way to stay on top of all the news events is to read Forex Crunch
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