Trading strategies: spotting trend reversals


In this short video part of our series
on simple trading techniques. We’re going to take a quick look at spotting trend
reversals. Hello I’m David Jones from Capital.com. This is the latest in our series of short videos looking at some simple trading techniques, I’m really
just looking at what the price sanction is doing. We’ve talked about trading with
trends in the past. Now of course trends don’t last forever. There comes a point
where the market has been rising or falling, falls out and starts going the
other way; starts a new trend. So how can we spot these trend reversals? It doesn’t
have to be rocket science and we can use simple trend lines to do this. So rather
than talking about it, I think the easiest way is to show you on the chart.
So let’s take a look at a couple of example markets. Here’s the pound US
dollar daily chart, which the market slid heavily from May 2018 through to August.
We had this downtrend in place – I did actually use this as an example in one
of our other trading strategy videos, when I was talking about trading with
the trend and every rally up to this downtrend we saw the market run out of
steam. So the assumption is that trends are going to continue but of course
there comes a point when things change. Let’s just walk this forwards, so we can
see here, the middle of September 2018 things do change and we see the pound-
U.S. dollar finally breaking out of that downtrend, so it’s at this point we can
start thinking about a trend in the opposite direction. Okay so if we take it
off the lows looking at that, so now because the trend line has broken, we’re
going to switch our approach from selling into strength, to looking to buy into
the dips because now the market is in an uptrend, so any sell ups – like there’s a
major sell-off here, in the third week of September, we’re going to use as a buying
opportunity and we’re using our rising trend line here as support. But this
move here, this is our trend reversal. Let’s look at an example of an uptrend
changing into a downtrend. This is an hourly chart of the German stock market index, the DAX, during August 2018 so each bar, each candle, represents an hour’s worth of trading. We’ve got a very gradual uptrend – we do
have high lows, just about higher highs and this uptrend has been going for
about a week in this example. So we’re expecting any weakness back to here
is a buying opportunity but what we’re talking about courses trend reversals, so
let’s just walk forwards. So we have a really sharp move over a couple of hours, where it goes crashing through that uptrend. So it’s at this point we have to
start thinking “well that trend isn’t in place anymore”, so that’s when we switch
our approach from buying dips to looking to sell into strength, assuming a new
trend downwards is starting. This did end up being an extreme example, the market
did fall very heavily, but it shows how you have to be aware of these moves when they happen, but you don’t need to have lots and lots of different indicators on
your chart to identify trends and spot opportunities when those trends might be
changing. It’s important to point out these reversals don’t work all the time –
no nothing works all the time. There is no hundred percent no losing trading
strategy when it comes to financial markets but it as you saw that Pound-U.S. dollar example and also the DAX example, which was an extreme one, you
know if we see these levels break – the trend line break – it can give us a clue
and a major indication that maybe sentiment is starting to shift. We need to
adjust our approach and start trading maybe the other way, of course using
sensible risk management such as stop losses. We’ll start wrapping things up
there, as usual don’t forget there’s a whole load of content on our YouTube
channel. We look at individual markets during the week so: currencies, indices,
cryptocurrencies and look at trading strategies and technical analysis like
this. To never miss out just make sure you’re subscribed, by clicking on the
subscribe button and if you click the alarm bell notification, you get notified
every time we upload a new video but for this short introduction to spotting
trend reversals we’ll leave it there so from me, David Jones, and Capital.com
good luck with your trading.

7 thoughts on “Trading strategies: spotting trend reversals”

  1. So the big question for me is that it seems easy to see trendlines after the fact, but how do you see them before they emerge? Everyone draws trendlines AFTER the candles have already printed, but by that time we've missed out on the channel and the opportunity to trade…

Leave a Reply

Your email address will not be published. Required fields are marked *