Reversal pattern trading is one of the many ways you can take advantage of the market fluctuations. The key idea is to identify a trend change, and profit from the new trend. In the forex market, you can both go long or short. However, in other markets such as stocks and ETFs, it is less risky to eye only bullish reversals.
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While my key “Reversal Pattern Identifier” is the Ichimoku Secrets strategy, there are other ways to catch and confirm a reversal pattern as well. In this article, we will do an introduction to basic charting techniques.
Reversal Pattern Trading
Reversal pattern trading is based on a variety of patterns that, when confirmed, indicate that the trend will reverse.
You can identify reversal patterns either by looking at a big picture on the chart, or by analyzing 2-3 candlesticks.
Here is a list of some reversal chart patterns (big picture):
- Double top or double bottom.
- Triple top or triple bottom.
- Head and shoulders top or bottom.
- Saucer top or saucer bottom.
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Bullish reversal candlestick patterns:
- Morning star.
- Bullish engulfing.
- Bullish harami.
And here is a list of some of the most famous bearish reversal candlestick patterns:
- Evening star.
- Shooting star.
- Hanging man.
- Bearish engulfing.
- Bearish harami.
You can find in-depth description of all these patterns in my book, Invest Diva’s Guide to Making Money in Forex.
Key Strategy for Reversal Pattern Trading
The most important question in the mind of every Invest Diva is, “When do I enter the market? When should I buy, and what is the best price to sell at?”
For all the reversal chart patterns including doubles, triples, head and shoulders, and saucers, the steps in ordering a trade are as shown here:
Reversal Pattern Trading Steps
Once the technical pattern is confirmed, you need to check in with the four remaining points of the IDDA approach before you place an order. If everything looks fine, you can continue with the rest of the steps:
Reversal Pattern Trading Strategies
Of course, the price sometimes keeps moving even after it reaches the target price. But as we are smart and risk-averse Invest Divas, we don’t take greedy and nonessential risks. Here is an important reality check to keep in mind when investing in any asset:
Reversal Pattern Trading: Your Plan versus Reality
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Based on the IDDA approach to strategy development, you can’t rely on only one method of forex analysis. Let alone one method of technical analysis. Identifying reversal patterns and recognizing what they forecast can become biased even at the best of times. We should always use other types of analysis and tools of technical analysis to confirm a pattern. In other words, we should always use the IDDA approach to trading.
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