5 Easy and Effective Ways to Spot a Trend Reversal

Trend trading is the easiest and most reliable way to make money in any financial market.

But what if there is no trend, or we missed it? You have to either stick to the strategy and give up very profitable positions, or trade against the trend.

To learn how to make money on counter-trend trades, you need to: quantum code

Learn to identify the end of a trend, not a correction;

Create a strategy for trading on a market reversal.

In this article, we will focus on the first part, identifying a trend reversal. Let's start with the following quote:

“The main thing is stability and discipline. Almost anyone can make rules that will work 80% or more. The hardest part is finding the confidence to stick to these rules when things go wrong.”

Richard Dennis, trader who borrowed $1,600 and made $350 million out of it in 6 years.

How to Spot a Trend Reversal: Candlestick Analysis

The first thing we want to pay attention to: Japanese candlesticks.

Candlesticks are a graphical representation of four price properties:

Discoveries;

closures;

Minimum and maximum prices.

If you have not encountered candles before, the figure below will teach you how to read them correctly:

Japanese candlesticks are a powerful trading tool. With their help, you can determine the beginning of the correction, the transition of the market to the sideways and the beginning of a new trend.

It all depends on the strength of the candle and the context - the market conditions in which the candle is formed.

Next, we will talk about this in more detail.

  1. Hammer and shooting star (pinbar)

In the figure above, combinations of candles are highlighted.We want a medium one with a small body and a long shadow on one side.

In classical candlestick analysis, they are called "hammer" and "shooting star". The hammer has a shadow on the bottom, a shooting star has a shadow on top.

Now traders are increasingly using the name "pinbar", which came to us from Price Action - modern technical analysis.

Pinbar is a candle with a small body and a long tail on one side. For example, like here:

Pinbars, like other candlestick patterns, indicate a trend reversal.

It is important to remember that the trend can change to sideways or opposite. That is, an uptrend after a pinbar will not necessarily change to a downtrend: the price may move sideways.

Pinbar reversed the trend sideways after a downtrend

Candle context

The location of the formation of the candlestick pattern is also important. In addition, you need to consider how impulses move: is the trend slowing down or just gaining momentum?

Hopefully now you have a little better understanding of how to read market context. If not, open a chart, find a pinbar, and ask yourself a series of questions:

How fast was the price moving before the pattern appeared?

Is the price angle vertical or horizontal?

Have there been price pullbacks against the trend before?

Still having a hard time? Now let's look at examples

Finding a trend reversal using a pinbar

In the above example, the price of the pound sterling literally collapsed. At the end of the movement, a pinbar appeared. Note: it appeared exactly at the round level 1.38000.

We have received a trend change signal. It is early to enter a trade, although the shape of the candle and the length of the shadow are impressive.

Then the second pinbar is formed (arrow 2).The trend finally changes to sideways: the price is compressed, the price movement angle is directed horizontally.

As a result, after two pinbars, the price still goes up, and we earn our money:

  1. Three black crows and three advancing soldiers

Unusual names, right?

In fact, these are three candles that form at the top / bottom of the market. Closing for each of them is at the maximum (minimum), and the shadows are practically absent:

In this example, the trend bottomed the market three times. All three falls were impulsive: with each new blow, the sellers expended their strength.

Then, literally from the bottom, three white candles appeared - harbingers of good news for buyers. Each of the candles closed at the maximum, the upper shadows were small or absent.

Here is a mirror example with "three black crows":

Despite the fact that the candles were large, the signal of three black crows gave a very good profit.

Note that both patterns are signals of a long-term trend reversal. They always form at the top/bottom of the market.

  1. Bullish and bearish engulfing

This pattern is popular and incredibly effective. Sometimes it seems that he appears literally at every turn:

Absorption consists of two candles. The second candle with its body covers the body of the first candle.

In the example below, we see that it happens that one candle absorbs several candles at once (second note