What is a reversal?
Prices never keep moving in one direction all the time. Price in an uptrend won’t always keep going up and a price in a downtrend won’t always keep going down.
A reversal is the change in the price trend and reversals can happen in both directions.
Say that the price of a currency pair is going up, but will it always keep going up? No right, and when the trend changes, it is now in a downtrend, this is a reversal.
The same would be the case if the price was in a downtrend and then the uptrend began, this is a reversal too.
Many traders are scared of reversals but many traders just look to trace reversals.
If done properly then reversal trading could be very lucrative for you and it is also one of the most important parts of trend trading.
I’ll now tell you about the psychology behind these reversals and why it happens.
Psychology behind reversals
The main reason why reversals happen is that the price cannot keep going in one particular direction all the time. I mean it’s just not possible.
There will be times when conditions will change which will affect the trend and a reversal will happen.
As I’ve said all the time, the markets run on the demand and supply principle and the basis of mass sentiment.
When the majority of the people think that the price is cheap and start buying it, the price will go up.
On the other hand, when the majority of the people think that the price is too high and start selling, then the price will then go down.
See the state of the markets in the past couple of years.
The prices were going up fairly and then the pandemic hit us and everyone started panicking and everyone sold.
Look what happened, the prices of literally everything just tanked.
Just when we started having some progress with the vaccines and other things to deal with the pandemic, everyone started becoming optimistic.
With the optimism, people started buying everywhere and we saw a complete reversal and the markets started going up.
It is a never-ending cycle that the price will always be in and it gets me to the next part of the blog post, why you need to trade reversals.
Why you need to trade reversals
If you want to ride a massive price swing, then you’ll need to get in it right at the beginning and how would you do that? By spotting reversals.
See it this way, the price is going up and it’s on a wild up run. If you enter while the trend is going on, two things can happen, the price might continue going up after you entered, or it may reverse from there.
This is what most traders are afraid of that they might buy high and sell low which is the exact opposite of what they should have done.
But what if, you could spot some exhaustion in the price and it is giving you signs of a potential reversal, would you still stay away?
Well, if you’re getting a decent confirmation then I’d say take the trade, or else you might miss out on a lot of pips.
Lots of ifs and buts and I understand but isn’t trading a game of playing the probabilities?
We’ll have to take risks here and it should be calculated ones and if you get an opportunity to trade a reversal, then do it, but make sure that if you’re wrong then you don’t blow away your capital.
There will always be a reversal that will happen in the future and you just have to keep looking for it.
This brings me to the last part of this blog post, some important things that you should know about trading reversals.
What you should know about trading reversals
If you have traded in the markets any time then you will have seen that after a long price move in one complete direction, the price makes a counter-trend move.
Say for example that the price is in a strong downtrend and after some time the price goes up a little.
What is this counter-trend move, is it reversal or is it just a pullback?
This is one thing that you need to figure out when trading reversals or when trading any strategy.
What if you bought at this up move that happened during a downtrend and the price only went down again? You’d lose money.
But on the other hand what if you bought and your decision turned out to be right and you entered the new trend right in the beginning and rode it all the way? Pips everywhere.
That’s why you need to have a strategy to trade these reversals and shouldn’t just trade it blindly or else you might get caught on the wrong side.
Do you trade reversals?
Do you trade reversals? If yes, then what strategy do you use?
I am going to upload another blog post on reversals in which I’m going to talk about an amazing reversal trading strategy so make sure that you don’t miss out.
Share this blog post with others and let them also understand how reversals work in the markets.
Feel free to reach out to me through the comment section for absolutely anything.