How to Recognize Reversals

When you discern between retracements and reversals correctly, you can reduce the number of losing trades and even increase the number of winning trades.

It's crucial to identify if a price movement is a retracement or a reversal. It's right up there with paying taxes in terms of importance.

There are a few key differences between a temporary price change retracement and a long-term trend reversal.

They are as follows:

Recognizing Retracements

Method #1 for Identifying Retracements: Fibonacci Retracement

Fibonacci levels are a popular approach to determine retracements.

Price retracements tend to loiter around the Fibonacci retracement levels of 38.2 percent, 50.0 percent, and 61.8 percent before continuing the overall trend.

If the price rises above these levels, it could indicate a trend reversal. It's worth noting that we didn't state “will.”

As you may have guessed, technical analysis isn't an exact science, thus nothing is certain, especially in the forex markets.

Before resuming the rise, the price took a breather and rested at the 61.8 percent Fibonacci retracement level.

It dropped back after a time and steadied at the 50% retracement level before continuing higher.

Pivot Points (Method #2)

Using pivot points is another approach to assess if the price is preparing for a reversal.

Traders will look at the lower support points (S1, S2, S3) in a UPTREND and wait for it to break.

During a DOWNTREND, forex traders will watch for the higher resistance points (R1, R2, R3) to break.

If it is broken, a reversal may be on the way! Check out the Pivot Points lesson for further information or a refresher!

Trend Lines are the third method.

The final technique is to employ trend lines.

A reversal may occur when a significant trend line is broken.

A forex trader may be able to achieve a high likelihood of a reversal by employing this technical tool in conjunction with the candlestick chart patterns explained before.

These strategies can help you spot reversals, but they aren't the only one. Nothing, at the end of the day, can replace practice and experience.

With enough screen time, you can develop a system for recognizing retracements and reversals that suits your forex trading style.