Simple Trend Reversal Strategy – Uptrend to Downtrend

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Simple Daily Trend Reversal Trading System

***Please read this first post properly, yes this one! Please read the whole thread before posting a question that has already been answered multiple times!***

***STRATEGY UPDATED! 09/08/2020 – #4224***

Hello everyone I’d like to welcome you to my thread. I want to share with you a great strategy that I have been trading for over one year now consistently. I have had pretty good success with this strategy, and providing you follow ALL the trade rules of the strategy you can also have good success.

This strategy is based off of trading trend reversals. It requires you to be very patient, and calm as confirmed set ups are few, but when there is a confirmed set up it will be profitable most of the time. There are 4 main indicators that are used for this strategy.

We will trade mainly on H4 chart, although H1, and D1 time frames can also be used.

It is very important to make sure that all the indicators are in agreement for a confirmation of a trade, if not then it will reduce your probability of success.

Setting the SL & TP levels is a personal choice. For me when I do set a SL, I would normally set my SL at the previous swing high or swing low (previous ZigZag Arrow) and, check pivot levels. I also pay close attention to price action. The TP can either be a fixed target (+50-100 pips) or using Fibonacci retractment, % ADR, or when there is a new confirmed opposite signal to get maximum pips. You can also set a trailing stop after a predetermined min amount of pips made, and then move SL to BE etc. I will monitor the price action the majority of the time, and get out if I see the trend is changing, and a new reversal forming. Please see below the trade rules:

  1. A green ZigZag Arrow will appear.
  2. The Turbo JSRX indicator was/is in the oversold zone (Below the 30% level) and indicating a green uptrend.
  3. The price will hit and/or be within the pivot level zone (0-25 pips) levels, S61, S78, S100.
  4. When the candle crosses, and closes above the 10 EMA up from below, and only if the trade is still confirmed by the 3 indicators.
  1. A red ZigZag Arrow will appear.
  2. The Turbo JSRX indicator was/is in the overbought zone (Above the 70% level) and indicating a red down trend.
  3. The price will hit and/or be within the pivot level zone (0-25 pips) levels, R61, R78, R100.
  4. When the candle crosses, and closes below the 10 EMA down from above, and only if the trade is still confirmed by the 3 indicators.

So basically when all 3 indicators have confirmed a valid trade, and are all in 100% agreement with each other according to the rules, and the candle crosses, and closes above or below the 10 EMA, an order is validated, and opened.

It is also very important to monitor price action. Sometimes there will be a big fast move with the current candle shooting through the EMA, in that case I would not wait for the current candle to close, and I would enter straight away to catch the rest of the move. Do this at your own discretion!

This strategy works well, and I encourage all of you guys to try this strategy, and please share your results with us here in the thread. I know that this strategy can be very profitable for everyone. For now let us enjoy trading, and collecting more pips from the market!

Please subscribe to keep updated with all latest developments of this strategy.

Please give me your feedback, and lets all enjoy success from this strategy. Green pips to you all.

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Trend Reversals In Forex and How to Anticipate Them

Hi there Forex Traders!

Today’s article is focused on anticipating trend reversals in forex. When can Forex traders expect a trend to end? What signs are visible and looming on the horizon when the trend is losing steam? Find the answers to these questions and more in this article on forex trend reversals. We’ll take a look into the framework of trends, reversal trading, and the impact of reversal signals.

Bill Williams, the father of trends and indicators has a famous quote: “Go with the flow, ride the tide, bend with the trend.” We’ve discussed the “go with the flow” and “ride the tide” parts of the quote in previous articles. These articles explained the importance of a trend and defining a trend, and also dived into tools and methods of trend definition. You can find more in our Best Average Range Forex article.

In this article, we will cover everything you need to know about forex trend reversals. This includes the entire spectrum of trend environments:

  1. Trending environments
  2. Countertrend environments
  3. Lack of trend/range environments

This article, together with our article on forex entry methodology and nature of the Forex market should give you a great starting point on how to trade in the Forex market successfully.

And as a proof of evidence, we implement our specific trending strategy ourselves and made the following past trades: GNPZD +2.5, NZDJPY +2, GBPJPY, +0.3, EURJPY 0, AUDJPY 0, USDJPY -1, CADJPY -1 for +2.8 total this week.

Other trade calls, which were not taken by WET account due to normal risk management parameters, were GBPUSD +2, GBPCHF +2, EURNZD +1.7, AUDJPY +2, NZDUSD +1.3, AUDNZD 0, NZDUSD 0, CADJPY 0 (excluding the 6 trade calls that all went for +2 during FOMC). Take a look here at our trading room for more details.

Trend Reversal Trading

Let’s talk about trend reversal trading in forex. Every trend in the forex market will one day reverse and the trend will stop. But how will it stop and when? Will it make a small pullback or a big retracement? Will the currency pair make a reversal? These are difficult questions to answer.

This is why trend trading has higher statistical odds of success. And that is why when trading trend reversals, the Forex trader needs to have a trend reversal trading strategy to offset the lower odds of trading success. You need a higher reward to risk ratios in order to retain and remain profitable (unless a trader has a proven method which allows for lower r:r).

When and How to Identify Trend Reversals In Forex:

Trading trend reversals are usually recommended for traders with at least 5 years of Forex trading experience, and sometimes 7-10+ years. Until then, focusing on trend setups is the basic premise. The reason is simple: trading with the trend is already tough enough. First trend trading needs to be mastered.

Focusing on the trend trades is NOT as easy as it might seem. Why? Many Forex traders want to be in a trade right now. Many traders trade the Forex regardless of whether the market is set up sufficiently for their edge to materialize. Missing a trade is often unbearable for a trader, but chasing the market is hazardous for the equity curve and profitability. Other potential reasons for that could be a lack of trust in the trend and the attractiveness of picking a top or bottom. However, the middle 60-80% of the trend is the real juicy part traders should be targeting.

Trading with the trend requires a balanced dose of patience, discipline, trust, and confidence. Keeping one’s mindset focused on with the trend trades is already an accomplishment in itself, because most of the time it is oh-so-easy for the trader to wonder with their creativity and seek out trades that are in fact reversal trade setups.

Impact of Reversal Signals

Watching out for reversal signals is always important. Regardless of the fact if you are with the trend trader or reversal trader (or both), watching out for reversal signs is a very important part of trading. Reversal traders use these signals to establish their entries. With-the-trend traders use these signals to exit their trades and/or refrain from trading with the trend. By keeping an eye on the reversal signals, the with-the-trend trader becomes a smart trend trader.

Reversal signals could have various impacts such as:

1) Passive retracement – price goes sideways and corrects trend in time.

    • Usually a chart pattern such as a flag or triangle.
    • This retracement is shallow à corrective price action.
    • If the sideways move takes too long in time, then it will become a range (point 4).

2) Active retracement – price moves in a counter-trend direction and corrects trend by pips.

    • This retracement can vary in depth depending on the timeframe.
    • A retracement on the higher time frame would be deeper.
    • This retracement is more impulsive in nature.

3) Reversal – trend direction changes from up to down OR down to up.

4) Range – one trend stops and is followed by a range environment.

Also, the importance of multiple time frame analysis is back into play. Here is why:

A.) Reversal signals on a higher time frame command more respect from the market participants than from lower time frames.
B.) Multiple reversal signals on 1 time frame give more confluence and increase the odds of the signals indeed having an effect.
C.) Multiple reversal signals on multiple time frames also increase the odds of those signals having an effect on the price.

Important warning: reversal signals and chart patterns take time to play out and develop and usually do not materialize immediately.

Reversal Signals

Potential reversal signals can vary widely. We will discuss my methods and also look at a few other commonly used techniques to tackle this topic.

1) Divergence: This method is often number one on the reversal signals list and it should be. The trend is your friend and it will remain so until the trend becomes unsustainable. The latter happens when the trend is not supported with sufficient momentum. If the price is making higher highs and higher lows, but the oscillator is not confirming price action with equivalent higher highs, then the probability of trend continuation is decreasing. This means 1 of the above scenarios (passive or active retracement, range or reversal) is imminent. In the case of a retracement, the trend can and will continue. Obviously, the trend ends when a range or reversal kicks in. More on trading divergence here.

2) Candlestick reversal patterns: Candlesticks are great indications when a move would have higher statistical odds of ending. A pin bar or engulfing twins are candlesticks which indicate that the with-the-trend move is losing its momentum.

3) Support and resistance: This includes Fibonacci retracement / tops & bottoms / trend lines / moving averages / Fibonacci targets / Fibonacci extension. When in a trend, it is important to keep an eye out for obstacles that could hinder a trade from developing. In an uptrend, a Forex trader wants to check whether a resistance level (such as the ones mentioned above) could be blocking the trade from developing (opposite is true for the downtrend). The most important resistances are always on 1 and 2 time frames higher than your usual chart viewing time frame.

4) Chart patterns: Head and shoulders, inverse head and shoulders, rising wedges, falling wedges, double top, double bottom, triple top, and triple bottom are all examples of chart patterns that indicate a lack of trend continuation probability. The confirmation of the pattern completion is the break of the neckline.

5) Weakness: Lower highs and higher lows. A trend is confirmed when it keeps posting lower lows and higher highs. If a trend cannot break resistance or support and price forms lower high or higher low, then the steam of the trend might be slowing down. Be careful, as the trend could only be encountering a small hiccup before continuation, especially if this happens in a trend channel. The lower high or higher low could in some cases be a pattern as mentioned above as well.

6) Trend lines and trend channels: An important signal and confirmation of a trend ending is the break of the trend channel. The break of the trend channel or line is not an immediate indication of a reversal, however, as the currency could also become a range (using the top or bottom as support and resistance). It just shows that the past trend has been placed in the fridge for now (end of trend), and the trader needs to be cautious or even refrain (depending on the strategy preference and trader) from trading until more evidence supports the ideal trading environment of the Forex trader.

7) Break of the bottom or top: The break of the bottom or top indicates that a range formation is less likely and that the chances of a reversal occurring are increasing.

8) Nature of price action: Price will move either impulsive or corrective. Knowing which is which will help understand the momentum dynamics of the market structure. An important aspect to realize is that the market can make impulsive corrections (moves with momentum against the trend), and corrective impulses (moves a with little momentum with the trend) as well, although the opposite is most common and likely.

9) Elliott Wave counts: By counting the waves and the waves within waves (sub-waves), a Forex trader can increase their understanding of the market structure and provide more accurate weight to certain scenarios or paths of least resistance.

10) Time Frame Analysis: Depending on how long a move takes to develop, the likelihood of a trend continuation is decreasing. If the with-the-trend move occurs too quickly, then there is a higher statistical probability of a retrace. If the with-the-trend move occurs too slowly, then a with-the-trend move has less statistical chances of occurring and the odds of reversal or range environment are higher.

11) Other elements: Ichimoku cloud, oscillator peaks, oscillator crossovers, price breaking through moving averages, Gann angles, Gartley patterns, bands, Bollinger bands, candle highs/lows, etc. Here is an example of a master candle setup.

Conclusion – Trend Reversals in Forex

What elements do you use for identifying the end of trend signals? Did this article help you?

Let us know down below in the comment section. Please leave a comment below if you have any questions about Trend Reversals.

Please give this strategy a 5 star if you enjoyed it. Thank you and good trading!

(2 votes, average: 5.00 out of 5)
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The Trend Reversal Trading Strategy Guide

Last Updated on October 27, 2020

You’ve probably heard this a million times…

“Don’t trade against the trend.”

And I’ve said it myself too.

But here’s the thing…

Trend reversal trading can be crazily profitable — if you do it right.

You know how to identify high probability trend reversal areas.

You can catch market tops and bottoms with heightened accuracy.

You can identify potential trading setups that yield 1 to 5 risk to reward (or more).

I know it sounds too good to be true.

Because after reading this post, you’ll discover the secrets to trading trend reversal like a pro.

Here’s what you’ll learn:

Then let’s begin…

Do you make these mistakes in reversal trading?

Here’s the thing:

Trend reversal trading can be a profitable way to trade the markets. However, like any other trading strategy, there is a correct and a wrong way to do it.

Before I teach you the correct way to do it, first let me explain how you should NOT trade market reversals.

1. You’re catching a falling knife

For those of you who don’t know what’s catching a falling knife, it means trying to long the markets when it’s plummeting like a rock.

It looks something like this:

There’s absolutely no sense in trying to catch a falling knife.

Because there’s no logical place to put your stop loss; there is no Support or market structure you can refer to.

And usually, the only way to set your stop loss is based on the equity left in your account — a surefire way to lose it.

“Rome was not built in a day, and no real movement of importance ends in one day or in one week. It takes time for it to run its logical course.”

So here’s the thing:

Trends need time to reverse its direction. It needs to sucker in “the latecomers to the party” till there is no one left to buy — and that’s when it goes in the opposite direction.

2. You’re entering on the first pullback

Now, another mistake traders make is attempting to trade the first pullback.

This means you go long when you see the market rallies after a huge decline. But often, this type of rally is only a retracement of the existing trend.

Here’s what I mean:

You’re probably wondering:

“Why do traders do this?”

You don’t want to miss the next big move, thus you enter as soon as the markets show a sign of reversal. Unknowingly, this sign is usually a retracement of the existing trend.

And even if you catch the bottom in the markets, it’s unlikely you’ll hold the trade for long.

Think about this…

Prior to this trade, you’d probably tried to catch market bottoms often.

And while doing so, you’d have suffered multiple losses along the way — and this hurts your psychology.

So, when you finally catch a bottom in the markets, you won’t hold the trade for long as you’ll experience the fear of losing (from your earlier trades).

This makes you exit your trades quickly and you end up missing the big move.

Now, let’s move on…

The 4 stages of the markets and why it matters

Now before you can identify trend reversal, you must understand the 4 stages of the markets (a technique I learned from Stan Weinstein).

Because this gives you warnings that market conditions are about to change — which lets you plan trading decisions ahead of time.

The 4 stages of the markets can be broken down into:

  1. Accumulation stage
  2. Advancing stage
  3. Distribution stage
  4. Declining stage

1. The accumulation stage

The accumulation phase looks like a range market in a downtrend.

However, from an order flow perspective, the buyers and sellers are in equilibrium (that’s why the market is in a range instead of a trending market).

Generally in the accumulation stage:

  • The ratio of bullish to bearish candles are close
  • The 50-period moving average is flattening out
  • The price whips back and forth around the 50-period moving average

As time goes by, stops will gradually build up beyond the range as traders long near the lows and short near the highs of the range.

There’s no guarantee that the market will reverse from here.

But it alerts you to the possibility that the bears are getting weak and the bulls could take control and push the price higher above the highs of the range.

And when this occurs, it leads us to the next phase…

2. The advancing stage

The advancing phase is essentially an uptrend with price making higher highs and lows.

From an order flow perspective, the buying pressure overwhelms the selling pressure (that’s why the market is trending higher).

Generally in the advancing stage:

  • There’s more bullish than bearish candles
  • The bullish candles are larger than the bearish candles
  • The price is above the 50-period moving average
  • The 50-period moving average is pointing higher

The advancing stage eventually will need to “take a break” because the early buyers will take profits and sellers will look to short the markets as prices are at attractive levels.

When this occurs, it leads us to the next phase…

3. The distribution stage

The distribution phase looks like a range market in an uptrend.

It tells you the buyers and sellers are in equilibrium (that’s why the market is in a range instead of a trending market).

Generally in the distribution stage:

  • The ratio of bullish to bearish candles are close
  • The 50-period moving average is flattening out
  • The price whips back and forth around the 50-period moving average

As time goes by, stops will gradually build up beyond the range as traders long near the lows and short near the highs of the range.

There’s no guarantee that the market will reverse from here.

But it alerts you to the possibility that the bulls are getting weak and the bears could take control and push price lower below the lows of the range.

4. The declining stage

The declining stage is essentially a downtrend with price making lower highs and lows.

Generally in the declining stage:

  • There’s more bearish than bullish candles
  • The bearish candles are larger than the bullish candles
  • The price is below the 50-period moving average
  • The 50-period moving average is pointing lower

Now, the declining stage eventually will need to “take a break” because the early sellers will take profits and buyers will look to long the markets as prices are at attractive levels.

When this occurs, it leads us back to the accumulation phase.

How to identify trend reversal like a pro

Now you’re wondering:

“But Rayner, how do you know if the market will break higher of the accumulation stage, and not just continue trading lower?”

That’s a great question.

The secret is this…

You want to identify an accumulation stage that leans against the Support on the higher timeframe.

Here’s how to do it:

  1. Identify Support on the higher timeframe (e.g. Daily)
  2. Identify an accumulation stage on the lower timeframe (e.g. 1 hour)

1. Identify Support on the higher timeframe (Daily)

Look the market to approach Support on the Daily timeframe; the more significant the level, the better.

2. Identify an accumulation stage on the lower timeframe (1-hour)

Then, go down to the lower timeframe and identify an accumulation stage.

What you want to see is for the lows of the accumulation stage to lean against Support on the higher timeframe.

As a general guideline:

If you identify Support on the Daily timeframe, then you can identify an accumulation stage on the 1 to 4-hour timeframe.

Or, if Support is on the Weekly timeframe, then you can identify an accumulation stage on 4-hour to Daily timeframe.

Trend reversal trading setups that work

Now, there are 3 ways you can trade this setup:

  • Support & Resistance
  • The Breakout
  • The Pullback

Assuming you’re using the Daily and 1-hour timeframe combination, these setups will be found anywhere between the 1 to 4-hour timeframe.

Support & Resistance

If you haven’t realized by now, the low of an accumulation stage is an area of Support (plus it’s leaning against the higher timeframe Support).

So, if you’re expecting higher prices, won’t it make sense to go long at this area?

Here’s what I mean…

Pros:

This setup offers a very favorable risk to reward as you’re entering in the earliest stage of the move. Imagine, your potential reward if the market breaks out of the accumulation stage?

Cons:

The price may not re-test Support thus not giving you an entry signal.

The Breakout

Alternatively, you can wait for the price to breakout higher and then enter the trade.

Pros:

You will catch every move as the market transit from an accumulation stage to advancing stage.

Cons:

It could lead to a false breakout.

The Pullback

Lastly… you can wait for the pullback to occur before entering the trade. For example, when the price retraces to previous Resistance turned Support, and forms a bullish reversal candlestick pattern.

Here’s what I mean:

Pros:

This setup offers a favorable risk to reward as you’re entering at an area of value (previous Resistance turned Support).

Cons:

The pullback might never come and you risk missing the move.

Next, you’ll discover how to time your entries, stops and exits when trading trend reversal.

Trend reversal trading: Entries, stops and exits

So now the question is…

How do you time your entries in trend reversal trading?

Well, there are two ways to go about it…

  1. Limit order
  2. Reversal candlestick pattern

1. Limit order

You can set a limit order and enter without “confirmation”.

The good thing is you have a favorable risk to reward on your trades as your entries are near the highs/lows.

The downside is it’s psychologically difficult to buy when the market is falling (and you need the experience to know which levels are worth trading).

2. Reversal candlestick pattern

Or, you can use reversal candlestick patterns to time your entry (like Bullish Engulfing, Hammer, etc.).

So, you’ll enter a trade only after the market shows signs of reversal. However, you risk entering at a much higher price.

Here’s an example…

Bullish reversal candlestick pattern at Support:

How to set a proper stop loss in trend reversal trading?

When it comes to stop loss, you want to place it at a level that invalidates your trading setup.

This means if your stop loss is hit, then the pattern is “broken” and there’s no reason to stay in the trade any longer.

Here’s an example…

Let’s say you buy the breakout of Resistance.

Clearly, if the breakout is real, the price shouldn’t return into the range or else, it’s a failed breakout.

This means you can set your stop loss below Resistance where the price shouldn’t return to.

If it does, you know your trading setup is invalidated and it’s time to get out of the trade.

Here’s what I mean…

Now if you want more details, then go watch this training below…

How to exit your winning trades

Now, your exits depend on your goals.

What do you want to accomplish — capture a swing or ride a trend?

Capture a swing

If you want to capture a swing, then you can exit your trades before opposing pressure steps in.

If you’re long, then you want to exit your trade before Resistance or swing high.

Here’s what I mean…

Ride a trend

And if you want to ride a trend, then you can trail your stop loss as the market moves in your favor.

For example, you can trail your stop loss using the 20MA.

Here’s an example…

Does it make sense?

Summary

In this trend reversal trading strategy guide, you’ve learned:

  • Never catch a falling knife or trade the first pullback of a downtrend
  • Understand the 4 stages of the market so you know when the price is likely to make a trend reversal
  • Trend reversal trading setups: Support & Resistance, the Breakout, and the Pullback
  • You can enter on a limit order or wait for a candlestick reversal pattern to time your entry
  • You should set your stop loss at a level where if reached, your trading setup is invalidated and you’ll get out of the trade
  • There are 2 ways to exit your winning trades, capture a swing or ride the trend
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