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Forex Reversal Strategy Part 1

Being able to capture the reversal of a forex market can be very profitable for a trader. Therefore I will like to share with you a forex reversal strategy that I have been using so that you can make money trading it as well. First of all, you will need to be able to read […]

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    Being able to capture the reversal of a forex market can be very profitable for a trader. Therefore I will like to share with you a forex reversal strategy that I have been using so that you can make money trading it as well.

    First of all, you will need to be able to read the market for a possible reversal. There are times where the market is actually doing a retracement and some traders started to see it as a reversal and they started to get into a reversal trade which eventually lead them to losses.

    Below are some ways you can trade the forex reversal strategy

    Reversal Candlestick Pattern

    If you read a book on candlestick patterns, you will see that there are numerous reversal candlestick patterns available. However it is impossible for anyone to remember them all and at the same time, not everyone of them are as effective.

    Throughout my years of trading, I have identified 2 reversal candlestick patterns that are more effective and they are Head & Shoulder and Double Top/Bottom.

    1) Head and shoulder pattern

    From the picture, you can see that there is a formation with 2 lower shoulder at the left and right side as well as a higher head at the middle of the formation. This is what we call the top head and shoulder pattern. This pattern usually appear at the end of an up trend.

    Top HandS

    When you see an inverted version of the above formation, you are actually seeing the bottom head and shoulder pattern. This pattern usually appear at the end of a down trend.

    Bottom HandS

    Whenever you see such a formation, you should start to draw the neckline by connecting various swing lows if it is a top head and shoulder pattern. If it is a bottom head and shoulder pattern, you should draw the neckline by connecting the various swing highs.

    What you should be waiting for now is the breach of the neckline. When the price breaks the neckline for a top head and shoulder pattern, you will enter a SHORT trade at the start of the next candle.

    When the price breaks the neckline for a bottom head and shoulder pattern, you will enter a LONG trade at the start of the next candle.

    2) Double Top/Bottom

    From the picture below, you can see the formation of a double top. A double top formation looks like a letter M.

    Double Top 2

    From the picture below, you can see the formation of a double bottom. A double bottom formation looks like a letter W.

    Double Bottom 2

    Similar to the head and shoulder pattern, you will need to draw a neckline for these 2 patterns.

    When you see the price breaking the neckline of a double top formation, you will enter a SHORT trade.

    When you see the price breaking the neckline of a double bottom formation, you will enter a LONG trade.

    In the Part 1 of this forex reversal strategy post, I have taught you how to trade the market reversal using candlestick patterns.

    In the next part of this forex reversal strategy series, I will show you how to trade the market reversal using the 200 EMA.

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