Step 2: Decide what trend reversal indicator you are you going to use
So now should have identified an instrument that looks like it’s trending.
Next it’s time to take a closer look – we need to add some context to that blank chart.
And that means adding some indicators, or looking for some patterns.
Indicators (or chart patterns) usually kick off all sorts of problems with traders. It’s like traders hear the word “indicator” and their brains starts to malfunction with all the choice available.
The hundreds of different indicators, thousands of different settings, an infinite number of combinations. It’s too much to process.
But remember – we don’t need to get bogged down in any of this.
Here’s the thing: doesn’t really matter what trend reversal indicator you use. There’s not much difference between them. I realise that saying this almost heresy in the world of trading – but it’s true.
It’s a bit like a runner buying a new pair of trainers before a race. There’s a huge choice of different types and styles to choose from. But ultimately, there’s not a huge difference between them all - and picking one over another isn’t going impact the end result very much. It certainly isn’t a substitute for good training, sleeping well, eating properly beforehand, etc.
A brand new pair of expensive, top of the range trainers aren’t going to make much difference to the runner who has done his training and is well-prepared. A reasonably good pair will be all the runner needs to do well.
Likewise - one indicator versus another isn’t going to make much difference to a trader who knows how to trade properly. A reasonably good indicator will be all the trader needs to do well.
So relax – take it easy, no more agonising over the endless choice. Just pick an indicator that you like using. No pressure – there’s no right or wrong. All of them have pros and cons.
You can spot a forex trend reversal with any the following indicators/patterns. You’ll not go too far wrong using any of these:
Watch for a break in a pattern of Higher Highs and Higher Lows
Forex trends move in waves. These are often known as higher highs and higher lows (or in a bearish market, lower lows and lower highs).
For simplicity, we’ll just refer to the bullish pattern – higher highs and higher lows. Just switch it around to get the bearish alternative.
If you can spot a series of higher higher highs and higher lows in the forex market, congratulations – you’ve spotted a trend. When that pattern ends, the trend usually ends with it. (We’ll look more at how the patterns ends in a moment)
You can also use moving averages to tell you when a trend is beginning to reverse.
When you are using certain moving averages – you know that you have a lot of big traders behind your back.
Take the 200 day simple moving average for example: the 200 day will be on the screen of some of the biggest banks and fund managers. If a market falls below the 200 day moving average, it’s a big deal. It’s a sign that the trend is coming to an end and possibly reversing.
(If you’re interested in a strategy that uses moving averages, check out the 3 Little Pigs Trading Strategy and its moving average MT4 trend indicator)
Another popular moving average strategy is watching for crossovers. Many algorithmic black box traders use moving average crossovers to monitor the health of a trend.
One combination they use is a 20 and a 50 combination – but other combinations can be used too.
The sign is when one moving average crosses over the other.
If you are interested in using moving averages in your trading, you should check out this moving average trading strategy.
Traders have been using candlesticks to interpret market trends for years.
A lot of traders get put off by the stupid sounding names that people give the different patterns. Don’t worry – you don’t need to learn any of that.
The only topics you need to know are:
(If you’re interested in a strategy that uses candlesticks to identify trend reversals, check out the PAST Trading Strategy and its MT4 Trend Reversal Indicator)
Chart patterns are another popular way of identifying when a trend might be beginning to come to end. There are lots of different types of chart patterns you can use, but one of the most widely used one is the head and shoulders pattern.
When you see a head and shoulders pattern, it’s a sign that buyers are running out of momentum and the trend could be on its last legs.
As we’ve said already, there are a lot of different ways you can identify trend reversals. If none of the above appeal to you, you can try some of the honourable mentions below:
Divergence
Pivot Points
Mean Reversion
Ok – so is your head spinning yet? Crippled by choice?
If you’re wondering how you decide which one to pick, there’s some good news for you – it’s easy.
Forget about trying to find out which one works best – because you’ll never get a firm answer to that question. You could spend years testing the different types and still not reach a worthwhile conclusion.
So now should have identified an instrument that looks like it’s trending.
Next it’s time to take a closer look – we need to add some context to that blank chart.
And that means adding some indicators, or looking for some patterns.
Indicators (or chart patterns) usually kick off all sorts of problems with traders. It’s like traders hear the word “indicator” and their brains starts to malfunction with all the choice available.
The hundreds of different indicators, thousands of different settings, an infinite number of combinations. It’s too much to process.
But remember – we don’t need to get bogged down in any of this.
Here’s the thing: doesn’t really matter what trend reversal indicator you use. There’s not much difference between them. I realise that saying this almost heresy in the world of trading – but it’s true.
It’s a bit like a runner buying a new pair of trainers before a race. There’s a huge choice of different types and styles to choose from. But ultimately, there’s not a huge difference between them all - and picking one over another isn’t going impact the end result very much. It certainly isn’t a substitute for good training, sleeping well, eating properly beforehand, etc.
A brand new pair of expensive, top of the range trainers aren’t going to make much difference to the runner who has done his training and is well-prepared. A reasonably good pair will be all the runner needs to do well.
Likewise - one indicator versus another isn’t going to make much difference to a trader who knows how to trade properly. A reasonably good indicator will be all the trader needs to do well.
So relax – take it easy, no more agonising over the endless choice. Just pick an indicator that you like using. No pressure – there’s no right or wrong. All of them have pros and cons.
You can spot a forex trend reversal with any the following indicators/patterns. You’ll not go too far wrong using any of these:
Watch for a break in a pattern of Higher Highs and Higher Lows
Forex trends move in waves. These are often known as higher highs and higher lows (or in a bearish market, lower lows and lower highs).
For simplicity, we’ll just refer to the bullish pattern – higher highs and higher lows. Just switch it around to get the bearish alternative.
If you can spot a series of higher higher highs and higher lows in the forex market, congratulations – you’ve spotted a trend. When that pattern ends, the trend usually ends with it. (We’ll look more at how the patterns ends in a moment)
- Pro: one of the oldest, most-watched ways of identifying a trend
- Con: can sometimes be difficult to spot in real markets
You can also use moving averages to tell you when a trend is beginning to reverse.
When you are using certain moving averages – you know that you have a lot of big traders behind your back.
Take the 200 day simple moving average for example: the 200 day will be on the screen of some of the biggest banks and fund managers. If a market falls below the 200 day moving average, it’s a big deal. It’s a sign that the trend is coming to an end and possibly reversing.
(If you’re interested in a strategy that uses moving averages, check out the 3 Little Pigs Trading Strategy and its moving average MT4 trend indicator)
Another popular moving average strategy is watching for crossovers. Many algorithmic black box traders use moving average crossovers to monitor the health of a trend.
One combination they use is a 20 and a 50 combination – but other combinations can be used too.
The sign is when one moving average crosses over the other.
If you are interested in using moving averages in your trading, you should check out this moving average trading strategy.
- Pro: you can be confident that you’ll be watching the same signal as the big traders
- Con: moving averages can struggle in choppy markets
Traders have been using candlesticks to interpret market trends for years.
A lot of traders get put off by the stupid sounding names that people give the different patterns. Don’t worry – you don’t need to learn any of that.
The only topics you need to know are:
- Preceding Trends
- Strong Reversals
- Long Wick Reversals
- 2 Candle Reversals
(If you’re interested in a strategy that uses candlesticks to identify trend reversals, check out the PAST Trading Strategy and its MT4 Trend Reversal Indicator)
- Pro: One of the earliest indicators of a trend reversal
- Con: Lots of failed signals in a strongly trending market
Chart patterns are another popular way of identifying when a trend might be beginning to come to end. There are lots of different types of chart patterns you can use, but one of the most widely used one is the head and shoulders pattern.
When you see a head and shoulders pattern, it’s a sign that buyers are running out of momentum and the trend could be on its last legs.
- Pro: the most widely used technical analysis you can get
- Con: can sometimes be tricky to draw in real markets
As we’ve said already, there are a lot of different ways you can identify trend reversals. If none of the above appeal to you, you can try some of the honourable mentions below:
Divergence
Pivot Points
Mean Reversion
Ok – so is your head spinning yet? Crippled by choice?
If you’re wondering how you decide which one to pick, there’s some good news for you – it’s easy.
Forget about trying to find out which one works best – because you’ll never get a firm answer to that question. You could spend years testing the different types and still not reach a worthwhile conclusion.
