What Makes a Good Reversal Trade?
#471: What Makes a Good Reversal Trade?
In this video:
00:24 – What do we look for when looking for a reversal trade?
01:08 – Getting ready for a new trade
01:26 – What exactly are we looking for?
03:13 – Don’t forget to look at the price
05:00 – Bollinger bands give us more clues
06:45 – We trade Reversals and Continuation Patterns
08:30 – Blueberry Markets for MT4 and MT5
09:13 – Look at my 5 Star Rated Forex Coaching Program
What clues do we look for to suggest that a trend is about to reverse? Let’s talk about that and more right now.
Hey there, traders. It’s Andrew Mitchem here at The Forex Trading Coach with video and podcast number 471.
What do we look for when looking for a reversal trade?
Want to talk about reversals today and what constitutes a good reversal, what do we look for to suggest that a reversal is about to take place.
You can use this in many different ways. You could use this, let’s say, you were in a buy trade and the market’s moving up beautifully. It hasn’t quite got to your profit target, let’s say, and you might see some form of indication that the market is about to reverse against your long or your buy position. That’s something that could help you to suggest to either get out of the trade altogether early, or maybe partially close from trade, or maybe move to stop loss. But there’s clues there that I’m going to talk about that can help protect that trade if you are already in a trade.
Getting ready for a new trade
If you’re not already in a trade and you’ve seen the market moving up and you’ve missed that trend, but all of a sudden, you now see a few clues that I’m going to mention that will help you to take a short position against that uptrend, then that is also a very good trading opportunity.
What exactly are we looking for?
What is it that we’re looking for? To start with, to make things easy, I’m going to be talking about a current uptrend and then a bearish reversal.
If we’re looking for a bearish reversal for me, I look at candle patterns and I’m looking for outside or engulfing candles. But I don’t just look at every single engulfing or outside candle go there as a sell trade. Absolutely not. There’s other things that we want to see.
If we’re looking for a bearish reversal, first of all, we need to see there’s been a good, strong prior uptrend first. The reason for that is not every uptrend can keep going obviously. Everything will stall and exhaust and then turn around. We’re looking for that turnaround because this is talking about reversal trades.
First of all, we need that good, strong prior uptrend. If we have a reason for that to look like it’s stalling, it could be an indecision candle such as a pin bar, hanging man, doji candle, where basically the price has gone up, formed a new high, and it’s come back and it’s closed near the low of the candle, or it’s an indecision candle it’s gone up, it’s gone down and it’s closed near it’s open, something like that is giving us an early warning system, basically. It’s saying after this big, strong bullish trend, all of a sudden, the next candle has given a clue that the market’s gone up, reached a point and it’s coming back, or it can’t decide whether it wants to go up or down any further. That’s our first indication. Then to get confirmation, then we need the bearish candle to come next.
Now, again, not every indecision and bearish candle is a setup. We need lots more. First of all, as mentioned, we need that prior trend. We need that exhaustion. Then we’re looking for other clues.
Don’t forget to look at the price
Now a lot of people fail to look at the actual right-hand side of the chart, which is the most important, and that is the actual price. You have to look to see why that indecision and then potential reversal has happened. Why has it gone up and gone no further? Why is it stored there? Looking at the price will give you a really good clue and indication of maybe that the indecision candle or the pin bar’s gone up and it’s hit a round number. Now I call a round number anything ending in 00 or 50 and so the price has gone up, hit that strong level. The sellers have now started to take over and it’s driving the price down. Now you have a reason why that candle formation is happening.
You could also look back across the left on your chart and you could go across and go, that’s interesting. The last time the price got to this level, it reversed. It’s gone and down its price action. It’s now come back and it’s formed an indecision candle and it’s exhausted at that same level that it did back on the left-hand side of your chart back previously, and look what happened back then. It dropped. You may go back even further and go, oh, the time before it got to that price. Guess what, it stalled and it’s dropped. That’s giving us the clue that that price level is a barrier and that the price for whatever reason of that currency or that market that you are trading cannot breach that level and go any further.
It may go slightly over and take out a whole heap of stop losses and get people in on buy trades, et cetera, that just generally lose money. But in general, that area, that region of the chart will be a level that the sellers have now, or the buyers are getting out, and the sellers are now seeing as a great opportunity to start driving the market back down again. So candle patterns and price, again, not just those things. There’s a few other things we’ll look for.
Bollinger bands give us more clues
For me, I look at Bollinger Bands and if that’s happened all around with an upper Bollinger Band, because we’re talking a bullish trend and then a bearish reversal, that gives me an extra clue.
I’m looking for things like trendline breaks. Has there been a break of that uptrend with the bearish candle? If there has, fantastic. Now we’re starting to build a picture here of what we’re looking for, for a quality grade setup.
Then on top of that, we’ve now potentially identified a good trade. We may have negative divergence, even better. We may have strength and weakness, even better.
But what else are we looking for? We still need room to move for the profit target. Have we got enough room so that you may have got your pin bar and engulfing bar, but you then might be now selling directly into a very strong support level. So you don’t want that. You want room to move so that the trade can then come down in your anticipated reversal direction and have plenty of room to move with not too many other barriers in its way or obvious barriers in its way at the time.
Also another thing to add to that is if our trade can have stop-loss protection, that will also help. It could be a pivot point. It could be a previous resistance area. It could be a round number. So you’re always looking to add more and more layers of protection to keep the trade from being stopped at, of course, but also you want to give yourself the best opportunity for the market to then continue downwards in your direction to get to your profit target without too many barriers in the way.
We’re building all this picture together, and that is what we’re looking for, for a bearish reversal. Of course, complete opposite if you’re looking for a bullish reversal. You want the prior downtrend, et cetera, exactly the same but in reverse.
We trade Reversals and Continuation Patterns
That’s one of the things that we teach here at The Forex Trading Coach. We’re all about trading two types of trades, reversals and continuations. You put those two patterns and those two sets of patterns together, you have yourself two very easy patterns to see, but two high probability patterns.
That’s what trading’s about. It’s about keeping things simple, easy to see. Is there a setup, yes or no? Take trade or move on. It’s as simple as that. That’s really what it comes down to. You get those high probability trades and then you add in things like the money management that we talk about and the limit orders to get high reward to risk. You can now start to see how we achieve very high rewards risk trades with high probability, but they’re easy to see. Of course, we only look to take a trade on the close of a candle so you know exactly when to look at your charts again.
All we’re doing is simplifying everything because people just overcomplicate things and just get far too much confusion with lines crossing over the lines and news events and all these other things that really are not necessary and will just cause you confusion and cause you losing trades and will then cause you to be frustrated and likely give up.
We’re about the opposite. We’re about wanting people to enjoy their trading, to enjoy their life, to make money, to look at the market quite simply and quite easily and say, “Yes, here’s a trade. This is how I’m taking it. Here’s a high probability setup. If it works in my favour, it’s going to make me 2, 3, 4 to 1 risk. If it gets stopped out, that’s trading that’s probability. I had a high quality trade set up at the time, but my risk and my loss is very, very low.” So that’s our philosophy for trading.
Blueberry Markets for MT4 and MT5
If it comes to for you to take look at a new broker or you don’t have a broker at all at this stage, I can highly recommend Blueberry Markets. They’re a fantastic broker. I’ve been there with them for years and years. I speak to them on a fairly regular basis. I’ve been over to Australia in the past and I’ve met up with them. Look, a lot of my coaching clients have been with them and go to them. A lot of just people that are just listening to the podcasts and the videos and go and check them out. I always, without fail, get exceptionally good feedback about their platform, their spreads, their team, and the way that they operate, which is why we recommend them. So have a look at Blueberry Markets.
Look at my 5 Star Rated Forex Coaching Program
Also have a look at my five star-rated Forex coaching course. It’s been running for over 13 years. We have clients in 101 countries right around the globe. It works because the strategy, as you can tell from listening to this and watching this, it’s simple, it works and people enjoy trading it because it’s profitable.
I hope that helps. This is Andrew Mitchem here at The Forex Trading Coach. I’ll see you this time next week. Bye for now.