Following the global money flow in the FX market daily is quite a task.
Forex is the most volatile and largest market in the current global setting, even though many don’t perceive it as such. The stock exchange, for example, particularly the New York Stock Exchange, has over $25.2 trillion in market capitalization in 2022.
To make a clear distinction, the forex market is valued at $2.409 quadrillion for the same year.
Forex trading is considered to be quite hard, but if you use the right forex strategies, then you can rest assured that you’ll generate some income. One moment in trading that picks the eye of many newbies and experienced currency traders is determining a reversal.
Continue reading to learn how to identify reversals and better understand FX exchanges.
How Does Forex Work?
Forex, short for Foreign Exchange Market, is one of the world’s most traded markets, and it actively operates 24 hours a day – only on weekdays.
Before starting to trade, choosing a good broker is your first step, which you can do when you compare forex brokers on Brokersview. After that, it’s choosing the right strategy.
Before learning to identify reversals, it is essential to differentiate them from retracements.
How To Differentiate Reversals From Retracements?
Reversals and retracements can be easily confused in trading, so distinguishing them could save you a lot of trouble.
Here are the major distinctions:
- Reversals:
- It can happen any time;
- Long-term occurrence;
- Change of fundamentals;
- Uptrending has little buying interest;
- The downtrend has little selling interest.
- Retracements:
- Only after huge direction movement;
- Short-term occurrence;
- No change in fundamentals;
- Uptrending has buying interest;
- The downtrend has selling interest.
How To Identify Reversals?
Identifying reversals can sound more complicated than it is, but with the correct information, these are quite easy to spot.
There are many diverse methods to help with reversal identifications but what is common about all of them is the simplicity to reach better trading in a few simple steps. Let’s see some ways to identify reversals today.
Recall the Fibonacci Levels
A very popular method in trading is using the Fibonacci levels. It is not always very simple, but it brings results to the table.
Fibonacci levels are lines that signal the possible support or resistance levels in which the price could change direction. This method works best when the marketing is trending, so the real potential can be revealed.
Buying when the market is at an uptrend and selling when the market is at a downtrend is the simple idea of the Fibonacci levels. So when the price swifts to a new trend direction, it logically means that it would return to a price it previously had and then resume its direction.
To use the Fibonacci levels, you must detect the Swing High and Low. The Swing High is when you have two lower highs on both sides of the candlestick. Contrary, the Swing Low has two higher highs on both sides.
Use Pivot Points
Pivot points are similar to the Fibonacci levels in some way.
They represent the support and resistance points, and the idea is to look at the support points for trending ups and the resistance points for trending downs.
Pivot points are important for trading because they are unbiased. The support and resistance levels are where the direction could switch and where a price evolution can occur. They either bounce or break, and these points resemble a point where reversals happen.
This method is especially useful for traders who are there for the short run. Identifying reversal points is easy – just by retracting the lowest support and highest resistance points.
Following the Trend Lines
After a trend line gets broken, a reversal happens – this is the logic behind the method.
There are three trend lines: uptrend, downtrend, and sideways trend.
When you connect the two most noticeable support areas, an uptrend or ascending trend line occurs. Connecting three or more means that the trend is likely to happen. In contrast, a downtrend, or a descending trend line, occurs when you connect the two major resistance areas.
The more excessive the line is, the steeper it gets – down or up, the more likely it will break and end the trend.
To Summarize
Many consider trading to be an ability when all it requires is time, patience, and will to learn. There are many approaches to identifying reversals.
The techniques mentioned above: Fibonacci levels, pivot points, and trend lines, when used in tandem with the correct confirmation indicator, might maximize the profits from your trading.
If you’re starting, sign up for a demo account at your favourite broker and try out ways to recognize when the asset price is about to change.
