Have you thought about why you want to beat the market? Beating the market is often piddled as an esoteric or hidden form of knowledge that few know but maybe, just maybe, you can learn. Trading reversals is made up of two-parts, one emotional and one part logical.
The error with this emotional approach is that often, if the facts go against ones beliefs, then so much for the facts meaning that in order to protect beliefs that a top or bottom is in play, a trader will often push ahead trying to prove their theory correct.
The logical part is that risk-reward is so favorable when trying to catch or trade a key turn. Reward as an excuse for the emotional pull to attempt to buy the bottom or sell the top but at the end, this approach should either be avoided or traded carefully in a manner that will be soon explained. Instead, trading can better be learned by first, identifying the major trend and second, finding trading opportunities within the overall trend.
By finding trading opportunities in the overall trend, you can still have great Risk: Reward ratios without needing a rare sequence of event s are for a reversal to occur.
A reversal is not created on a whim. Therefore, when we believe a correction is turning into a reversal, we need to be skeptic and prefer trend continuation. But what goes into a reversal? While this is not a definitive list, a true reversal requires a near global change of sentiment or feeling toward an investment.
A change of sentiment requires a few things to fall in place that are rarely, if ever, by accident. First, the fundamental backdrop must change on multiple higher importance news events by way of a significant surprise to the upside or downside. In an uptrend, like we see with the USDollar, multiple tier-1 economic releases would have to miss economist expectations so that traders begin to doubt the validity of the rally.
Should the news continue to support the rally, the difficulty and cost for institutions to exit the position would defer the exit of the trend for more substantial evidence. Secondly, beyond the fundamental backdrop changing, a shift in multiple markets that are correlated or seen as a leading insight would have to change direction.
One such market that many fund managers keep an eye on is the bond market. The bond market is seen as the leader of stocks, currencies, and commodities whereas commodities are the last to turn. Should the bond market or another key market that is correlated to the underlying currency pair begin to turn against its prior trend, that move could cause other large traders to take note and exit the trade that can have a cascading affect.
Third, key technical barriers would need to break. A key technical barrier could be defined as multi-month support in an uptrend or resistance in a downtrend. For that reason, the first two components need to be in play before the third really matters. Hopefully you can see with this article that the trend should not be fought until substantial evidence has surfaced. However, we can ask, how should we act when the evidence has surfaced?
Should this uptrend be worth a short trade, we would have to see a substantial change to the underlying fundamental story, correlated markets breaking their prior trend, and key intermediate levels of support on this chart breaking as well so that you can enter with a favorable risk: Becoming a Fearless Forex Trader. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Click here to dismiss. Foundations of Technical Analysis: Classic Chart Patterns, Part I. Upcoming Events Economic Event. Forex Economic Calendar A:More...