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How to Spot a Trend Reversal in Forex Day Trading?

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Forex day trading refers to the completion of buying (opening a bullish position) or selling (opening a bearish position) a financial instrument during the same trading session. However, not all trading strategies are suitable for day trading. One of the most effective strategies for day trading is to identify reversals. Two easy ways to find trend reversals are to draw trend lines and analyze candlesticks.

Look for reversals through trendlines

One of the most basic tools in technical analysis is to draw trend lines. There is a famous saying "Trend is your friend", which encourages forex traders to identify the trend for a specific time period, draw an uptrend line connecting the lows of the uptrend price trend and draw the downtrend linking the high point of the downtrend price trend. Trend following strategy is an effective trading strategy. Equally effective are reversal trades, a strategy that is especially useful for contrarians who like to go against others.

The key to identifying a reversal is to first identify the trend line. After identifying the trend, the key point is to wait for the price to break out of the trend line. If the uptrend line is broken down, the candle for the session will close below the trend line, which indicates a good opportunity to continue to enter a bearish position, and the price can be expected to continue lower. If the downtrend line is broken upwards and the candle closes above the trend line, it indicates a good opportunity to enter a bullish position and the price can be expected to continue higher. While waiting for candle confirmation may seem pointless, it is very useful in preventing false identification of reversals.

Determine the candlestick reversal

The identification of candlestick reversals is more complicated and requires more practical experience than trend reversals because of their different appearances. Identifying a trendline reversal that has been breached is easier, but relying strictly on candlesticks to identify reversals is trickier. The first key to understanding the candlestick strategy is to understand what it measures. A candlestick consists of two parts: the body and the shadow. The body reflects the opening and closing price of a currency pair over a certain period, while the shadows reflect the price highs and lows over the same period. We will specifically describe the Doji candlestick, which is helpful in identifying potential reversals.

The most common type of doji is a candlestick that resembles a plus (+) or cross (t). If one of these patterns occurs, be sure to wait for at least one subsequent confirming candle to identify a reversal. If it is a downside reversal, the confirming candle will be the candle below the doji after it has appeared. Ideally, take a bearish position on the next candle below. If it is an upward reversal, the confirming candle will be the candle immediately above the doji. In this case, a bullish position can be opened on a confirmed candle close above.

Identifying trend reversals takes time and hands-on experience, but once this skill is developed, the potential opportunities for an alert forex day trader are endless.


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#1 - September 23, 2022, 08:58:06 AM

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