Trading Reversal Patterns
In this weekly video:
00:24 – Are reversal signals too risky?
00:58 – Reversal trades look really good on the charts
01:23 – An example from the GBP/JPY D1 chart
02:38 – Continuation patterns are a higher probability trade setup
03:18 – In Summary: Reversals and Continuation trades
03:38 – Look for “u” and “n” shapes on the charts
04:28 – New look website launched this week
Should you trade reversal patterns as a Forex trader or is it too risky? Let's discuss that and more right now.
Hey, Forex traders. Andrew Mitchem here from the Forex Trading Coach with video and podcast number 305.
Are reversal signals too risky?
This video and podcast is all about reversal signals; should you trade them, yes or no? Are they too risky? Basically it's all about helping you decide if they are correct for you or not. We were talking about this with my clients last night on a live two hour webinar. We were showing different reversal signals and continuation patterns. So I trade both of them myself, and they're both very high quality, high probability trade setups that we trade as part of the strategy here at the Forex Trading Coach.
Reversal trades look really good on the charts
However, the reversal trades, although on the chart they look really dramatic because when you think about it, if you had a large uptrend, you are then taking a sell position based on what you're seeing to ride the market right back the other way. Likewise, if you've had an uptrend you're looking for the downtrend, if you had the downtrend you're then looking for the reversal back up. So, on a chart they look fantastic.
An example from the GBP/JPY D1 chart
Right behind me here you might be able to see a daily chart of the Pound/Yen. Now, the Pound/Yen up until a few weeks ago has had a massive reversal, 1700 pips downwards, almost in a straight line. You look at that and then a couple of weeks ago, I think it was the 4th of January, we picked a buy trade based off the way that we trade off the daily charts against that 1,700 pip downtrend. It's worked out beautifully. You can go and look on charts, Pound/Yen daily chart 4th January, 2019, you'll see the trade that we took.
However, it's definitely a higher risk trade because it's against that massive downtrend. When you look back at the Pound/Yen over say November into December, you'll see lots of opportunities for continuation patterns. That is, the bigger picture downtrend looking for a pullback or a retracement back up and then the opportunity to go down again, to sell short to look for the Pound/Yen to drop. That's exactly what it did. Time after time and time again. Because of course nothing does a straight line; it's goes down, it pulls back, it goes down, it pulls back, all the way through as it steps its way down in that example.
Continuation patterns are a higher probability trade setup
So, continuation patterns. No one near as dramatic on the charts. They don't look quite so exciting do they? However, higher probability trades definitely if you know how to trade them properly. So we always look for more than just a candle setup; we look for confirmation of the price, what is the price has it bounced there before? What is the level, is it a round number? Is it a support and resistance level? Is it bouncing at like the upper or middle or lower Bollinger band? Do we have divergence positive negative? Hidden standard? All those type of things that we add to the mix to say, number one, this candle pattern looked really good. It's a reversal trade or it's a continuation trade. But then we add things to it.
In Summary: Reversals and Continuation trades
So, in summary, reversal trades really really dramatic, slightly higher risk because you are trading against the bigger picture. Continuations maybe don't look quite so cool on a chart, but they are certainly higher probability because you're trading with the main direction but after it's had a slight retracement or pullback.
Look for “u” and “n” shapes on the charts
So the other thing to look for, two very, very basic patterns in terms of n-shapes. Small letter “n”. So what does that mean? Well, let's say we've had the price pull up and then we've had confirmation to go short. It could be reversal or a continuation. But if you see that n-shape, that small letter “n”, it just helps to give you that sort of picture of where we are in the chart. That's a great opportunity to go short. Likewise, the “u”, letter “u”, small letter “u” if you had a downtrend and then confirmation to go long, that letter “u” on a chart … “u” and “n” is very, very powerful. What they do is they tend to have like only two or three, four sometimes, candles setting them up they tend to have trendline breaks, then tend to have exhaustions, and they tend to be great reversals and continuations.
New look website launched this week
So if you'd like to know more, all you need to do is visit our new-look website, theforextradingcoach.com, which was launched this week. Same kind of information on there, just looks a little bit cooler. Modernised it a bit. You can also contact me through the contact tab on that page. Anything you'd like me to discuss on future videos and podcasts, or if you have a specific trading question that you'd just like me to help you with, then feel free to contact me at the Forex Trading Coach. Once again, this is Andrew Mitchem. I'll see you this time next week.