Reversal Trading Strategy could be highly profitable because it is the proper way to enter in trend trading at the beginning of a trend. This reversal trading strategy works on any time frame (5 min, 15 min, 1 hour etc) in every market.
We are better off trading with the trend most of the time and when the price moves in a dominant direction, we are better off trading with it.
Table of Contents
- What is Trend Reversal?
- What are Reversal Trading Strategies?
What is Trend Reversal?
Trend reversal simply means change in price action direction. Trend reversals include uptrend that turn into downtrend and downtrend that turn into uptrend.
What are Reversal Trading Strategies?
We are not going to discuss all of them but just two of my favorite reversal trading strategies. You can try these two reversal trading strategies daily on chart.
1. Evening Star Reversal Trading Strategy :
The Evening Star candlestick pattern is a three-candle pattern that indicates a market turnaround.
How to identify Evening Star Reversal Pattern –
- Current uptrend: The market should have higher highs and lower lows.
- XXL Bullish candle: is the sign of strong buying pressure and a continuation of the current uptrend. There is no sign of a turnaround or a reversal at this time, so traders should only be searching for long trades.
- Small bearish/bullish candle: The second candle is a small candle – often referred to as a Doji candle – that signals the start of a fatigued uptrend or indecisiveness in trend continuation.
- XXL bearish candle: This candle shows the first real indication of fresh selling pressure. This candle gaps down from the previous candle’s close, signaling the start of a new downtrend.
- Trend reversal: Following a successful reversal, traders will notice lower highs and lower lows.
You should always manage the risk of a failed move by using well-placed stop losses.
2. Morning Star Reversal Trading Strategy
The Morning Star candlestick pattern is a three-candle pattern that can be used while trading in any market to signal a market turnaround. Correctly spotting a reversal is important because it enables traders to enter at lucrative levels at the very beginning of a potential trend reversal.
How to identify Morning Star Reversal Pattern –
- Current downtrend: Determine if the market is in a downtrend by looking for lower highs and lower lows.
- XXL Bearish candle: A large bearish candle is the sign of strong selling pressure and the continuation of the current downtrend. There is no sign of a turnaround at this time, so traders can just look for short trades.
- Small bearish/bullish candle: The second candle is a small candle – sometimes referred to as a Doji candle – that indicates a fatigued downtrend. As it makes a lower low, this candle often gaps lower. The key takeaway here is that the market is rather undecided, regardless of whether the candle is bearish or bullish.
- XXL Bullish candle: This candle shows the first real sign of a fresh buying pressure. This candle gaps up from the previous candle’s close, signaling the start of a new uptrend.
- Trend reversal: Following a good reversal, traders can notice higher highs and lower lows.
You should always manage the risk of a failed reversal by using well-placed stop losses.
Final Words: I hope, these two reversal strategies will work for you.
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