When watching forex price action, traders are mindful of reversal signals, which would allow them to catch big price moves in a single direction. Tops and bottoms can be identified using various methods and analysis forex trading charts before a trader takes a swing position and takes advantage of the whole price move. There are three main methods to identify reversals in forex:
The first way is to take a look at chart patterns. These formations have been observed to result in price reversals, especially if the confirmation signs are given. One example of a chart pattern that hints at a reversal is the double bottom. This pattern is formed during a downtrend and signals an upcoming uptrend if the neckline is broken. Conversely, a double top is formed during an uptrend and signals a potential downtrend if the neckline is also broken. Another example of a chart pattern that signals a reversal is the head and shoulders. The regular head and shoulders pattern is formed during an uptrend while the inverse head and shoulders pattern is formed during a downtrend.
The second way to pinpoint reversals is to take a look at candlestick patterns, particularly for longer-term time frames. The doji is an excellent signal of a reversal, as it reflects a tug-o-war between buyers and sellers. This is formed when the candle closes at its open price. Another candlestick pattern that signals a reversal is the spinning top, which has long wicks and a small body. A hammer is also considered a reversal signal when formed at the bottom of a downtrend while the hanging man is considered a reversal signal when formed at the top of an uptrend.
Lastly, technical chart indicators are also useful in identifying reversals. Momentum indicators or oscillators can both be used, although it could lead to better results when they are used in tandem. As an example, stochastic in the oversold region shows that the selling pressure is exhausted and that an uptrend might take place. Stochastic in the overbought region shows that buying pressure is overdone and that a selloff might happen.
In addition, combining all three ways of spotting reversals can help improve the odds of catching a real reversal, particularly when the technical settings are properly aligned. Combining these three kinds of reversing spotting methods can help increase the odds of being right, especially when the parameters are correct.