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
Downtrend
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.
Trend reversal buy
The break of recent lows in an uptrend and can signal the end of the uptrend.
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.
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.
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
Trend reversal 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.
