Enhance your ability to analyze trend reversals in the market and take advantage of them effectively by using support and resistance, chart patterns, break of trendlines, divergence, and change of our trend indicator.
The trend is your friend until it bends. Simple words and a short sentence capture the very essence which Forex traders must aim for in order to achieve success. To keep trading simple and focused on trend trades is the way to go. Maybe that is a simple message but applying tactics that turn the strategy into profits is not as easy. The Double Trend Trap strategy offers a comprehensive method for capitalizing on the trend.
This article, however, focuses on the other side of the coin which is the “until it bends” part. The trend is our friend – yes. But when does the trend bend? How does a bend look like and when do we make decisions? Five (5) practical examples are shown in this article.
1. Support and Resistance
For trend traders, it is vital to know where the key support and resistance levels are. The clash between trend and trading support and resistance has been well documented in a previous article (click here). However, the quick summary is that the trend has a high chance of either stalling or reversing at big daily and weekly tops and bottoms and trend traders need to trade with caution when a trend gets close to it. Here is an example of the GBPJPY which is not able to break through the support (magenta line).
2. Chart Patterns
Chart patterns are clear and simple communication messages from the market. Some of these patterns confirm highs odds of trend continuation; whereas other chart patterns warn of potential trend reversals. These reversal patterns include the rising and falling wedges, double and triple tops and bottoms, and the inverted and normal head and shoulders (H&S). When reversal patterns occur, trend traders want to be very cautious with current positions and avoid taking new trend trades. In the chart example below we see an inverted H&S (purple), a normal H&S (green), double top (red) and double bottom (magenta/brown).
3. Break of trend lines
Trends have angles at which they move. Trends with steep angles can last for a while but eventually correct to a more sustainable angle of 30-45 degrees. Trend lines are great for measuring the angle of the trend and the pace at which it is “moving”. Generally speaking, 3 types of trend lines are used:
- steep / inner
- medium / trend
- shallow / outer
When an inner trend line breaks the trend does not undergo a change because the price could easily stop at the medium trend line. But a break of the trend channel is the first serious clue of an upcoming reversal. More confirmation is needed for a potential trend to the opposite side, but the old trend at that point is out of the window. Once the outer trend line and support and resistance are broken, the old trend is for sure a thing of the past. Take some tie to learn forex trendline trading strategy in the link above.
When the price is posting higher highs in an uptrend or lower lows in a downtrend, but the oscillator does not have higher highs or lower lows as well, then the currency pair has divergence. When the oscillator also has highs or lower lows then there is convergence. The oscillator is basically a measurement of momentum so when momentum does not confirm the trend there is less chance of a trend to successfully continue. Here is a quick good to guideline:
- Divergence - danger for trend
- Convergence - green light for trend
5. Change of our trend indicator (Not all of you will have this, but that's OK)
For members, our Trend Indicator is a great way to get a head start on when the long-term trend may be changing. All you have to do is drag the Strike Trend Indicator onto ANY chart (even non StrikeTrader pairs) and choose which Time Frame you'd like to get a trend verification for
As an example, on the GBPUSD we have seen a major reversal. The Strike Trend indicator was able to catch this pretty quickly and those looking for longer-term trades would be in GREAT shape to short the market for several hundred pips after defining the trend change.
This is an easy way to spot potential turn-around in the market.
By combining all of these tips, we think you can really enhance your ability to analyze trend reversals in the market and take advantage of them effectively by using support and resistance, chart patterns, break of trendlines, divergence, or change of our trend indicator.
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