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Trend Reversal Strategy Advice

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Nick Goold

Trend reversal trading is attractive as it can achieve high win rates and consistent profits. A trading strategy is required, as trend reversal trading can lead to losses in trending markets.

What is a trend reversal trading strategy?

A trend reversal trading strategy is a trading position entered against the market’s trend. The direction of a moving average indicates the current market trend.

A moving average pointing higher indicates an uptrend, and a downward trend is when the moving average direction is lower.

Uptrend

Up trend

Downtrend

Down trend chart

A trend reversal trading strategy would enter a short position (sell) in an uptrend and a long position (buy) in a downtrend.

Trend reversal trading examples

This article will introduce three trend reversal trading strategies that can help you find profitable trading opportunities.

1. Trend reversal trading strategy: High-low analysis

Trend reversal sell

An uptrend is a sequence of higher lows and higher highs and a downtrend is a sequence of lower lows and lower highs.

Reversal sell

Trend reversal buy

The break of recent lows in an uptrend and can signal the end of the uptrend.

Reversal buy

2. Trend reversal trading strategy: Break of moving average

Trend reversal sell

The moving average will point higher in an uptrend and act as support.

A break below the moving average can signal a trend reversal trading opportunity and profitable selling opportunities.

MA reversal sell

Trend reversal buy

In a downtrend, it is the opposite. When the market is falling the moving average acts as resistance.

A break above the moving average can predict a rise in prices.

Trend reversal buy

3. Trend reversal trading strategy: Large gap from moving average

When prices move a long way from the moving average, it is likely that the market will reverse and return to the moving average.

Trend reversal sell

MA gap sell

Trend reversal buy

MA gap buy

Trend reversal trading advice

Point 1: Always use a stop loss

Trends can last a long-time, so you need to control your losses. Sometimes it can take a couple of trades to find the right entry point, so exit your losses quickly. After entering a trend reversal position, place a stop loss straight away.

Point 2: Do not add to a losing position

Adding to losses can be dangerous when trading a trend reversal strategy, as your losses can be much higher than your profits. Instead of adding to your losing positions, exit with a loss and wait for another entry point.

Point 3: Understand market news

Following market news will help improve your ability to find a successful trend reversal entry point. A news event can lead to market moves, and it is best to wait until the impact of the news event has reduced before trading against the market trend.

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