5 Practical Forex Tips and Examples for Spotting Trend Reversals

The trend is your friend until it bends. Simple words and a short sentence capture the very essence which Forex traders must aim for in order to achieve success. To keep trading simple and focused on trend trades is the way to go. Maybe that is a simple message but applying tactics that turn the strategy into profits is not as easy. The Double Trend Trap strategy offers a comprehensive method for capitalizing on the trend.

This article however focuses on the other side of the coin which is the “until it bends” part. The trend is our friend – yes. But when does the trend bend? How does a bend look like and when do we make decisions? Five (5) practical examples are shown in this article.

1. SUPPORT AND RESISTANCE

For trend traders it is vital to know where the key support and resistance levels are. The clash between trend and support and resistance has been well documented in a previous article (click here). However the quick summary is that the trend has a high chance of either stalling or reversing at big daily and weekly tops and bottoms and trend traders need to trade with caution when a trend gets close to it. Here is an example of the GBPJPY which is not able to break through the support (magenta line).

31- 7- 2014 s&r

2. CHART PATTERNS

Chart patterns are clear and simple communication messages from the market. Some of these patterns confirm highs odds of trend continuation; whereas other chart patterns warn of a potential reversal. These reversal patterns include the rising and falling wedges, double and triple tops and bottoms, and the inverted and normal head and shoulders (H&S). When reversal patterns occur, trend traders want to be very cautious with current positions and avoid taking new trend trades. In the chart example below we see an inverted H&S (purple), a normal H&S (green), double top (red) and double bottom (magenta/brown).

31- 7- 2014 dt2

3. BREAK OF TREND LINES

Trends have angles at which they move. Trends with steep angles can last for a while but eventually correct to a more sustainable angle of 30-45 degrees. Trend lines are great for measuring the angle of the trend and the pace at which it is “moving”. Generally speaking 3 types of trend lines are used:

  1. steep / inner
  2. medium / trend
  3. shallow / outer

When an inner trend line breaks the trend does not undergo a change because price could easily stop at the medium trend line. But a break of the trend channel is the first serious clue of an upcoming reversal. More confirmation is needed for a potential trend to the opposite side, but the old trend at that point is out of the window. Once the outer trend line and support/resistance is broken, the old trend is for sure a thing of the past.

31- 7- 2014 tl

4. Divergence

When price is posting higher highs in an uptrend or lower lows in a downtrend, but the oscillator does not have higher highs or lower lows as well, then the currency pair has divergence. When the oscillator also has highs or lower lows then there is convergence. The oscillator is basically a measurement of momentum so when momentum does not confirm the trend there is less chance of a trend to successfully continue. Here is a quick good to guide line:

  1. Divergence - danger for trend
  2. Convergence - green light for trend

31- 7- 2014 div

5. CHANGE OF OUR TREND INDICATOR (Not all of you will have this, but that’s OK)

For members, our Trend Indicator is a great way to get a head start on when the longer term trend may be changing. All you have to do is drag the Strike Trend Indicator onto ANY chart (even non StrikeTrader pairs) and choose which Time Frame you’d like to get a trend verification for

strike_trend

As an example, on the GBPUSD we have recently had a major reversal. The Strike Trend indicator was able to catch this pretty quickly and those looking for longer term trades would be in GREAT shape to short the market for several hundred pips after defining the trend change.

trend_indicator

 

This is an easy way to spot potential turn-arounds in the market.

By combining all of these tips, we think you can really enhance your ability to analyze reversals in the market and take advantage of them effectively.

Let us know which methods you like and which you may be using in your own trading! Just leave a comment below!

Wishing you Happy Trading!

The following two tabs change content below.
Casey founded Winners Edge Trading in 2009 and is working to create the most current and useful Forex information and training available on the internet.
Follow our social media:
1359774937_facebook 1359774984_linkedin 1359774949_twitter 1359774960_google 1359774973_rss 1360027635_youtube

Winner’s Edge Trading, as seen on:

Winner's Edge Trading in the news

  • razif

    i agree with you to use support and resistance combine with candlestick reversal formation and trade according to the trend. On the chart pattern most of the time you have to wait longer time for the pattern to form and you dont get a good price to trade because bigger stop losses. One more thing that i would like to add here and strongly suggest for traders to use in trading beside the above mentioned is Fibonacci.

  • Chris

    Hey Alex, not sure if I can help, I dont know the dynasty indicator. Thanks for the comment!

  • Chris

    Thanks JodyP for your comments – much appreciated. Im sure traders will be happy to see the great advice, thank you.

  • alex

    hay howz it, im using the dynasty indicator and using the williams oscillator, i have found it pretty good but when dynasty is triggered and the arrow is long or short i enter and the market has gone the opposite way, why is this happening, cheerz alex,

  • JodyP

    see example 3., Trendline Breaks: Firstly, on 5 occasions the price hit the lower trendline and the trend was intact with 5x lower lows and 5x lower highs. On the 6th downward run, momentum faded and the price reversed long before hitting that lower trendline again. It then retraced back to the higher trendline – a very good signal that the momentum has faded and a reversal or at least a consolidation is imminent. *Note the ‘double bottom’ on that ‘reversal’ low – an indication of trend reversal in itself. 2ndly the price punched through the upper trend channel and kept going. 3rdly the price action made for a higher high. 4thly the price action came back down but this time made a higher low before going north again. A trend reversal has occured and a new uptrend is now underway. Incidentally, the pullbacks within this trend often retrace to close to a .618 or .764 fib level, then project back in line with the trend to a 1.27 fibonacci extension level. Generally good buy and sell zones. Note also, the higher timeframes especially weekly and monthly -outside of the intraday ‘noise’. A good policy to trade in that higher time frame trend direction – assuming there is a longer term trend easily visible. Heiken Ashi charts have some lag, but can make trading and seeing trends much easier than standard candlestix. Learn the candlestick meanings anyway. A pinbar in an extended trend is often a dead giveaway for a trend reversal, but all the trend reversal candletick patterns should be observed, especially around those levels and confluences mentioned below. Do some visual checks and backtests and see how often the above rings true. But watch the bigger picture and check larger time frame charts for past price action and major pivot points. Place horizontal support and resistance lines on your chart extending across from those levels. Note the Fibonacci levels and fib extensions from those last significant S&R and pivot point levels. And learn about the ‘confluence’ of multiples of those levels coming together for an even stronger potential reversal area. Note your momentum indicstors as you approach those levels. Keep an eye on the economic calendar for upcoming days. Find a good source of reliable forex news. Explore the apps for tablets too. Some very good stuff out there.

  • Chris

    Hi Beergas, thank you for the comments. Great to read that the trend indicator is helping you with your trading. That’s awesome. Cheers!

  • Chris

    Thanks Zippy and Mihai, the images should now be working. Thanks for the headsup!

  • beergas

    Charts showing ok me. I like the DTT for medium term confirms. When both sets line up there’s a solid signal reversal. Can be faster turns though if stock bouncing around like #2 #3. Then turn may not last as long as in #4 in a longer run up. Thanks guys, saving this one.

  • Zippy

    images still missing

  • Chris

    Thank you for the comment Osita! Chart patterns are great tools aren’t they :)

  • Chris

    Thanks for the heads-up. I also have the images as missing – although they were present last time I looked. I’ll sort it. Thanks!

  • Mihai

    The images are missing…At least, on my computer.

  • Phoebe Ejimbe

    I use chart patterns most such as head and shoulders, inverted head and shoulders, double/tripple tops/, rising and falling wedges to recognise likely reversal of trends. A great article! Thanks Chris for sharing!

  • Phoebe Ejimbe

    I use chart patterns most such as head and shoulders, inverted head and shoulders, double/tripple tops/, rising and falling wedges to recognise likely reversal of trends. A great article! Thanks Chris for sharing!