When a currency pair reverses, it demonstrates a shift in the demand for a currency and provides traders with information on where the areas of support and resistance exist. These forex reversals provide excellent opportunities to make profits if a trader is able to spot the signs that a currency pair looks set to reverse. Examples of short and long-term price reversals can be seen on any time-frame and often result in a significant price swing and an excellent way to gain pips with a great risk:reward ratio.
Spotting when a currency pair may be ready to reverse from its current trend is not a science and, as with all forex trading, is not always 100% accurate. However, there are a number of tools which can be used to spot when price may be approaching its zenith and which help forex traders to ensure that probability is on their side.
Oscillator and price action combinations to spot forex reversals
Many forex traders use oscillator indicators to inform them when a currency pair may be overbought or oversold. These are generally a good tool to use because it ensures that a lot of forex traders are thinking the same when it looks as though a price reversal may be due. The problem is that price can remain oversold or overbought for long periods which means that an oscillator cannot often be used as a trading tool alone but requires some additional confirmation that a reversal is very probable. This is where price-action analysis comes in very helpful and the use of, in particular, candlesticks to show that price is genuinely weakening and ready to reverse will greatly increase the probability of success.
The one opportunity, however, that traders may be able to trade simply from an oscillator is when divergence in the chart price and the indicator confirm the trade. This is when price moves to a higher high or lower low on the price chart but the oscillator disagrees and shows a lower/higher level than that on the price chart. This is a classic setup for a forex reversal and shows that the market is weakening and due a correction at the very least.
Using previous support and resistance to pinpoint reversal zones
Looking at any chart there are areas where price has previously reversed and which can be considered areas of support and resistance. Often, these are areas where many traders have already placed buy and sell orders in the market which are triggered and create a powerful price movement in the opposing direction. Spotting these areas on a price chart takes some practice but they become highly reliable areas for potential forex reversals.
Applying the additional verification of an indicator and price-action to these levels will offer an excellent probability of a profitable trade. Furthermore, stop-losses can be placed nearby beyond the level of support in order to minimise the risks and allow traders to take advantage of a complete forex reversal when they occur. These opportunities are also available on any time-frame and, for those forex traders who prefer to trade fast, it is well worth looking at the reversal points at recent highs/lows on the intraday 5 minute charts.
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