{"id":93461,"date":"2016-07-25T16:39:33","date_gmt":"2016-07-25T20:39:33","guid":{"rendered":"http:\/\/countingpips.com\/?p=93461"},"modified":"2016-07-25T16:39:33","modified_gmt":"2016-07-25T20:39:33","slug":"how-to-spot-and-trade-on-reversals-without-getting-burned-by-fakeouts-and-pullbacks","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2016\/07\/how-to-spot-and-trade-on-reversals-without-getting-burned-by-fakeouts-and-pullbacks\/","title":{"rendered":"How to spot and trade on reversals without getting burned by fakeouts and pullbacks"},"content":{"rendered":"
July 25, 2016<\/div>
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By\u00a0Sashi Asakura<\/strong><\/p>\n

Do you trade reversals\u00a0with something like these rules and conditions?<\/p>\n

Sell when a price hits an upper Bollinger band and RSI is\u00a0overbought<\/p>\n

Buy when a price hits a lower Bollinger band and RSI is oversold<\/p>\n

Sell or buy at MACD crossover and MA crossover coincide<\/p><\/blockquote>\n

I know I know most of these reversal conditions\u00a0are from the internet and basic Forex books\u00a0that are just explaining the basic definitions of technical analysis tools\u2026.but there\u2019s a tiny little problem.<\/p>\n

We\u00a0look at the market from pure price standpoint using bollinger bands and RSI and MACD and MA, but we are ignoring volume momentum analysis. The market leaves three distinct traces to us at any given time: price, volume, and time. And if we don\u2019t use volume information, we are basically looking a flower on a\u00a0black and white TV losing all the colourful information like traders\u2019 emotions, sentiments, and momentum.<\/p>\n

I hate to say this but that\u2019s exactly how most Forex traders trade because nobody really talks and teaches the importance of volume momentum analysis.\u00a0All they care about are shapes, lines, and cool looking colourful indicators..<\/p>\n

So if you have done that in the past, it is time to wipe that blemish away from your career canvas and start afresh.<\/p>

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Let\u2019s start with the mindset..<\/p>\n

The Mindset:<\/strong><\/h2>\n

Price represents consensus of value, while volume represents emotions of participants\u00a0\u2013 intensity of traders financial\/emotional commitment as well as pain of losers<\/strong><\/p>\n

Price reflects rationals while volume reflects their commitment, feeling, emotion.\u00a0Crowd is more likely to follow its heart and emotion than its mind and that\u2019s why volume often precedes price.<\/p>\n

The Philosophy of\u00a0Trend Reversals<\/strong><\/h2>\n

Let me explain how\u00a0trend reversals happen:<\/p>\n

When price is going up, there are two things happening in the market:<\/p>\n

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  1. sellers are getting stop out because price is going up. Sellers exit the market by closing their sell positions by buying, which causes the price to go up more and their lost money gets transferred to buyers profits<\/li>\n
  2. buyers are placing\u00a0new buy positions\u00a0because they feel more confident seeing the price hiking up. New\u00a0buy positions\u00a0push up the price even more.<\/li>\n<\/ol>\n

    However, eventually the market will run out of losing traders (sellers) as the price goes up, because most of sellers were already stopped out. So there isn\u2019t much\u00a0funds transferred from losing sellers getting stop out to buyers, so the price wouldn\u2019t\u00a0go up much more. There will be less new buy positions because less sellers getting stopped out\u00a0and closing their sell positions\u00a0by buying at stop out, so less price hike and less new buy positions entered by confident buyers. Eventually trading volume will decrease even if the price is close to the high.<\/p>\n

    This is when reversal is about to happen at higher highs because there is less volume of trades to back up price movements upward. It\u2019s like an army led by officers in front of solders has\u00a0strong momentum\u00a0\u2013 but an army\u00a0without officers and\u00a0leaders at the front is likely to reverse. Same, trend without volume (officers) will likely to reverse.<\/p>\n

    Falling volume shows running out of supply of losers and trend reversal \u2013 old loser trades bailed out but few new losers come in.<\/span><\/p>\n

    It is to be on top of volume analysis\u00a0to identify good reversals<\/strong><\/h3>\n

    That\u2019s all. And this alone can make a difference between a great reversal trade\u00a0materializing into profits\u00a0or your trades getting burned immediately by fakeouts right after the entries.<\/p>\n

    So, how do your remain top of trades?<\/p>\n

    The\u00a0Foolproof\u00a0Formula of\u00a0Reversal Spotting<\/strong><\/h2>\n

    Two very quick and extremely effective formulas that I have used countless times are below:<\/p>\n

    1. Use \u201cTraders Dynamics Index\u201d (TDI<\/a>) indicator<\/p>\n

    TDI is like RSI, Stochastics, and Moving Average all combined plus on steroid. RSI and Stochastics often give you overbought and oversold signals when trending, and don\u2019t give us much about when it\u2019s likely to reverse. Whereas TDI, it uses moving average of\u00a0RSI to identify reversals, and TDI crossover is proven to be way more accurate than RSI\u2019s oversold\/overbought signals.<\/p>\n

    2. Use \u201cAverage Directional Index\u201d (ADX) indicator<\/p>\n

    ADX takes into consideration momentum. If ADX value is < 40, then the market is quiet and not trending, like officers front of solders are retreating and thus losing momentum. Also, if ADX+ and ADX- line crosses over, then the marker reverses its trend.<\/p>\n

    Let me show you what I mean:<\/p>\n

    \"tdi\"<\/p>\n

    \"adx\"<\/p>\n

    See that wasn\u2019t complicated\u00a0or mumbo jumbo.<\/p>\n

    Stop trading like this because I don\u2019t have any idea what\u00a0is going on.<\/p>\n

    \"Screen<\/p>\n

    Make sure to look at the market from right angles. If you are using\u00a0price and candlestick patterns and\u00a0lines only, you are\u00a0discrediting the important market sentiments (volume information) and are losing a third of the market information right away.<\/p>\n

     <\/p>\n

    About the author:<\/strong><\/p>\n

    Sashi Asakura is the founder of www.IntrovertedForexEngineer.com<\/a>, the only place on the internet that makes Forex trading classy, systematic, and scientific. As a full-time software engineer and 6-year Forex trader, he develops effective algorithmic Forex systems backed by statistics\u00a0and methodical testing.<\/p>\n

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     <\/p>\n","protected":false},"excerpt":{"rendered":"

    By\u00a0Sashi Asakura Do you trade reversals\u00a0with something like these rules and conditions? Sell when a price hits an upper Bollinger band and RSI is\u00a0overbought Buy when a price hits a lower Bollinger band and RSI is oversold Sell or buy at MACD crossover and MA crossover coincide I know I know most of these reversal […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-93461","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/93461","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=93461"}],"version-history":[{"count":3,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/93461\/revisions"}],"predecessor-version":[{"id":93477,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/93461\/revisions\/93477"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=93461"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=93461"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=93461"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}