Tag: trend reversal

  • How to Identify Trend Reversal?

    How to Identify Trend Reversal?

    How to Identify Trend Reversal?
    Some strategies can help you to identify trend changes even before they happen.

    If you want to know how to identify trend reversal ahead of time, we’re sorry but it doesn’t exist. There is no trading system or methodology capable of doing that. The only thing you can do is to learn how to read the price action and identify potential zones where the market could reverse. 

    So, how to identify trend reversal? It appears when the direction of stock changes and goes back in the opposite direction. The examples of reversal are uptrends that reverse into downtrends and vice versa. What trend reversal tells us? First of all, the sentiment in the stock is changing. For example, an uptrend that reverses into a downtrend tells us that traders are taking profit from the overbought price of the stock. 

    On the other hand, when downtrend reverses into the uptrend shows the sentiment is changing to bullish. That means the buyers are boosting bids to reverse back into the bullish trend. Let’s examine several indicators that might help us to understand how to identify trend reversal. 

    Why is it important to know how to identify trend reversal? 

    The main importance lies in the fact that if you recognize the trend reversal on time, you’ll be able to exit the position in profit or at least, to protect your trade from extended losses. But the trend reversal also gives you a chance to profit if you trade in the opposite direction.

    But there is a problem to recognize the start of the trend. We can spot the new trend only when it is already formed. It is visible after the new direction starts. The other problem is that you don’t see just one trend. Let’s say that the time frame you’re trading may have a trend that differs from the other on the lower or higher chart.

    Use Moving averages to identify trend reversal

    Traders broadly use moving averages to identify trend reversal and as alert of the “potential” start of a new trend direction.

    Let’s say the price passes a moving average and goes above it, that could be a sign that an uptrend has just started. Hence, when the price goes below the MA indicator, the downtrend is starting. 

    For example, in forex trading, use two MAs, one slower and one faster. When the faster MA crosses the slower MA, it is a confirmation that the new trend is developing. But you have to be careful because technical indicators can lag prices. So, you will be late for any trend change. In the best scenario, you’ll recognize a new trend, not at the start, but very close to. Still, moving averages, particularly the 200 periods moving average, are helpful indicators that may show a trend reversal.

    How to identify a trend ending? 

    Trends aren’t highways. You cannot just start the engine and drive from point A to point B.  What we can do about trend reversals is to estimate its probability to happen.

    For example, while you are trading in an uptrend direction, you can notice on your chart that something may show the market has a high possibility of reversing.

    Bullish and Bearish – how to identify trend reversal?

    An uptrend is bullish price development that proceeds to make constant higher highs and higher lows. A bullish reversal appears when the stock stops making higher highs and begins to make lower highs and lower lows. In other words, it reverses the direction from up to down. 

    A bearish trend reversal develops the same formations but inversely. In a bearish downtrend, the price action creates lower highs and lower lows. When the price ends forming lower lows and establishes a higher low and remains to rise with higher highs and higher lows, it is a bearish trend reversal.

    Different time frames

    How to identify trend reversal on different time frames? 

    The high and lows can differ depending on the time frame chart you use. Let’s explain this. For example, you use the 60-minute and 5-minute charts. In the 60-minute chart, you can see a range of lower high and lower low in a downtrend. But, your 5-minute chart can show the uptrend where higher highs and higher low candlestick closes.

    This means, your 60-minute chart shows the overall constant trends but your 5-minute chart can show a different tendency. It shows moves back to the longer time frame resistance. Here are two possible scenarios. The price will return back down is one possible scenario. The other scenario could be, the price may continue to bounce and reveal the early trend reversal attempt. The time frame you are trading is very important. It has to be aligned with a more extended time frame trend.

    How to trade trend reversal

    You can trade trend reversal at different points during the reversal process.

    The first important thing that you must keep in mind is to regularly maintain trailing stops. It is important in case the reversal turns out to be a fake. Usually, trend reversal starts as a move that fails to bounce but finally succeeds in reversing the trend. The point of reversal is a break: breakout or breakdown. It is followed by the opposing trend direction. The uptrend will ultimately top.

    As the price tries to bounce again, it is faced with greater selling pressure. So, it starts to produce lower highs and lower lows to finally break support and forms the downtrend. 

    Of course, this trend reversal has to be confirmed. If you enter the position in anticipation of a reversal without confirmation,  that may expose your trade to a risk of getting a fake signal. Also, your stop-loss will be triggered and you’ll exit the trade without profit. 

    If you enter the trade based on the confirmation, your entry point can be too far, so you’ll profit a little. Also, you could get stopped low on the reversion.

    How to have a proper execution?

    After you get the confirmation, wait for the first attempt and enter the trade close to the reversal support zone. You’ll have enough time to enter the trade if you use some of the popular methods to confirm the trend reversal. 

    For example, you can use trend lines. They are a simple method of visually recognizing trends and reversals. You’ll need to draw the trend lines ahead of time and to actively monitor. It’s simple to draw the trend line. Just connect the highest high and the lowest high to make the upper trend line. To draw the lower trend line, connect the lowest low and the highest low. 

    Trend lines could be diagonal or horizontal. If both trend lines are moving up or down together diagonally, they are in an uptrend or downtrend. How to identify trend reversal occurs? If the opposite trend line of the trend gets breached and then developed in higher highs and higher lows we have downtrend reversal in a breakout. Hence, the lower highs and lower lows represent an uptrend reversal.

    In case both trend lines are horizontal,  it is a consolidation that will finally end as a breakout or breakdown. 

    Bottom line

    There is no system that can tell you how to identify trend reversal with total precision. The only chance we have is to watch the price action and identify the potential zone where the market could reverse. So, we have to identify the weakness in the trending move, and strength in the retracement move. The also important signal is a break of support and resistance. Some other indicators could be a break of the long-term trendline, or if the price is coming into the higher-timeframe formation, or goes parabolic. Also, pay attention if the price is overextended.

    The more concentrated circumstances there are, the greater the possibility of a trend reversal.

  • Morning Star Pattern How To Trade It?

    Morning Star Pattern How To Trade It?

    Morning Star Pattern How To Trade It?
    How to identify the Morning Star pattern, how to trade it? Is it bullish or bearish? Is the Morning Star pattern good or bad when seen in the chart?

    To know how to trade this pattern we have to know what the Morning Star pattern is. First of all, you have to look at three candles and are near the support level. If yes, to have the Morning Star pattern, the first candle has to be bearish, the second has to be doji, and, finally, the third has to be a bullish candlestick. This third candlestick is important because it creates a bullish reversal pattern. So, logically, the Morning Star pattern is a bullish reversal pattern. At first glance, it may not look as bullish but we’ll explain to you how to recognize this pattern when it appears. Also, Traders-Paradise will introduce you to some trading techniques related to the Morning Star pattern. 

    This pattern will always tell you that something good is on its way. Bullish traders will always look for this pattern because a great reversal may occur. 

    The advantage of Japanese candlestick patterns is that even one candle has the whole story but when they are arranged together, you’ll have the novel. In terms of trading stocks, you’ll have the pattern that will tell you when your stock is going to breakout or breakdown. What is more important, when using the Morning Star pattern, you’ll know everything about the emotions of traders. For example, if you see long-legged candlestick, you’ll know that there was a hard battle among bulls and bears but without progress or change. At the end of the trading day, they are both pushed to the starting levels. 

    Therefore, understanding of candlesticks and their purposes is essential.

    What is a Morning Star pattern?

    We’ll need three trading days to be sure the Morning Star pattern appears. As we said earlier, this pattern is bullish but the first candlestick is large and bearish. That is due to the current trend and the first candle is in harmony with the trend. The second candle you’ll recognize when you see a small real body. It is a doji. This doji reveals hesitation and it’s followed by the third candlestick which is bullish. This third candle should be a large bullish one (the charts aren’t perfect, so how big is this third one, doesn’t really matter at this moment), so it tells us the bulls are coming back. They want to take over.

    So, the first day the bears have absolute control. The candlestick from the next day will tell us that there was a battle between bears and bulls and one of them is in control but yet it isn’t known which one. That’s something that doji tells. Still, we don’t know who is the winner so we have to look on the second day as on the day of indecision. We’ll understand who has a control on the third day when the bulls actually are knocking down the bears and winning the battle. So, the new direction on the stock price is starting. The price reversal is here.

    How strong is the reversal? 

    Well, we have to consider several signs to be able to conclude that.

    The longer the candles, the higher reversal. Further, the reversal will be higher if there is any gap on both sides of the middle candlestick of the Morning Star pattern. 

    To make this clearer, the second candle is the star. It has a short real body, separated from the real body of the first candlestick. The gap between the real bodies of the two candles separates a star from a doji or a spinning top. The star may appear in the shadow of the first candle, it isn’t necessary to form below the low of the first candle.

    The appearance of the start is the first sign of bears’ weakness. They are not strong enough to push the price lower than the closing price on the prior day. The third candle will confirm their weakness. This third candle has to be lighter in color. Actually, the middle candle can be red or green or black or white because the bulls and bears are going to balance out across the session.) in the charts and pierces into the body of the candle from the first day. 

    Also, if there is a gap between the first and second days. Here we came to the size of the third candle. If this candle is higher than the candle from the first day, that means the greater the bullish takeover. 

    How to trade Morning Star Pattern?

    We already said the Morning star pattern is a sign for the start of a trend reversal. From bearish to bullish. Well, you have technical indicators on disposal that may help you to unveil the Morning Star is going to form. For example, when the price is nearing a support zone. The other indicator could be when RSI confirms that the stock is oversold.

    Also, pay attention to the volume. It can be a great contributor to the forming of this pattern. When the volume increases during the three trading days and on the third day it’s the highest that’s the confirmation of the Morning Star pattern followed by the reversal.

    You should take up a bullish position in the stock when the Morning Star forms. Then, ride the uptrend until there is an indication of an added reversal. So, it’s important to notice when the first falling bearish candlestick is going to form. Further, monitor for the second smaller candlestick which is spinning top or doji, as we explained above. Plan your stop now. When the third candlestick is formed it is a bullish one, wait until it breaks above the third and take a long position. If you go long, set your stop below the bottom of the last candlestick. Some traders would wait until the price drops below the third candlestick and then enter a short position and set a stop above that candle. 

    Bottom line

    This pattern is a bullish reversal pattern. That means that buyers (bulls) take control of the sellers (bears) and push the price in the opposite direction.
    Trading completely on visual patterns can be a risky plan. The Morning Star pattern is best when it is supported by volume and a support level, as the back indicators. It isn’t hard to notice this pattern. It will appear whenever a small candle occurs in a downtrend.
    Whatever the candlestick pattern you use, you have to understand that there are many variations of it and on it. But one thing is sure, the Morning Star is a bullish reversal pattern that tells us that some good things are going to come.

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