But as you already know, predicting a reversal point on a trading chart is almost impossible, because if there is a catalyst moving the market, price can move in one direction for a long period of time.

 

For example, let’s say price is in an uptrend, it makes higher swing highs and higher swing lows. Now, if the price starts to go sideways, some traders will look for reversal patterns like the double top pattern. Double top patterns can be really effective when used correctly, but in this example where the market is in a strong uptrend, how do you know the double top pattern is formed at the end of the trend? There is a good chance the price can go sideways, or give a small pullback instead of a reversal and can continue to move in the upward direction. Because of this, new traders are usually recommended to trade with the trend.

 

Since trend is your friend, instead of trading against your friend, what if I told you, that you can call yourself a reversal trader while trading the trend at the same time? Because, that’s what many professional traders do, especially the one selling the courses. Don’t get me wrong, there are reversal traders who trade actual reversals and make profits. But then there are traders who will trade reversals and trend at the same time. This is one of the most effective ways to catch the big move in trading. For example, let’s say bill the first wants to make money as a reversal trader. He finds a stock or forex pair where market is in an uptrend. Similarly, there is bill the second, who also wants to trade the reversal. He finds a different pair that is also trending upwards. At first glance, both of these charts look very similar to each other. Lets say, when the market goes sideways, a double top pattern is formed. Since double top pattern is a reversal pattern, both bill the first and bill the second take a short position.

 

Now remember, both of these charts were in an uptrend, so when the double top pattern occurred, on the first chart, instead of price making a big move down and starting a new downtrend, price reacted to the trend line and moving average supports, and simply went in the upward direction and continued its uptrend. On the other hand, price on the second chart actually gave a reversal and made a big downward move. On the first chart, bill the first made a loss. But on the second chart, even though the charts looked very similar at the first glance, bill the second made a big profit.

 

In this example, to understand why one reversal worked and other one didn’t, we will have to switch to a higher timeframe. 

 

If we look at first chart where bill the first lost money, you can see that the price is in a strong uptrend on the higher timeframe. Furthermore, it has just touched a support area and has enough room to move higher.

 

On the other hand, if we look at bill the second’s chart on the higher timeframe, you will noticed that unlike the first chart, this chart is in a strong downtrend. Not only that, but it recently touched a strong resistance area.

 

On the first chart, even though there was a double top reversal pattern, the price was in a strong uptrend on the higher timeframe which decrease the probability of giving a reversal on entry timeframe. In other words, bill the first lost his trade.

 

Now on the second chart, even though we had similar price action, the price did make a big move down and the reversal worked, because this reversal on the higher timeframe was actually a small pullback reversal in a strong downtrend. And since this pullback reversal was near a strong resistance area, the price made a big move down. In other words, bill the second made money with the reversal, because he analyzed the market a little bit better by using multi-timeframe analysis.

 

There are many people who will sell you a reversal course but you will probably never make money, because in reality when they show you their reversal trades, the trades are actually trend following setups on higher timeframes. They won’t tell you this because they want you to keep paying them money while you keep figuring out why your reversal trades don’t work.

 

There are trading setups that actually work without any multiple timeframe analysis. For example, let’s say there is a company whose stock has fallen due to some events. The company has a good reputation and its stock was trading at 500 dollars at one point. Due to some event that made the company employees stuck at home, the company made a loss, and the stock price is now near the 100 dollars mark.

 

Now 100$ on a stock is a psychological number. Numbers with multiple zeroes at the end usually work as a psychological support and resistance levels. Since this company had a good reputation and will probably make money when the employees come back to work, people will be interested in buying at the 100$ support level. Since we know this support level has a higher chance of working, we can look for reversal trading opportunities near the 100$ mark. Even if the price doesn’t immediately make big move in the opposite direction, there is a high chance that there will be a small push up, since many traders will be interested near this level, as the 100 dollars mark will be clearly visible on all timeframes.

 

There are many other popular reversal patterns like the channel and the trend breakout. But like I have said in my previous videos, just because a price breaks a tiny line you drew, doesn’t mean the price is going to make a big move in the opposite direction. Price can simply move in the sideways direction, and most of the time, it does.

 

Reversals are part of trading, and there is a saying that goes something like “price can’t go in one direction forever, it has to reverse at one point”. Well yes, but actually no. It doesn’t matter if the price can go infinitely in one direction or not, to trade reversals, what matters is how accurately you can predict a reversal point in a trend. In reality, most retail traders can’t predict the accurate timing of a trend reversal, and even if they could, many probably won’t be able to tell if it’s a reversal or just a small pullback. When you see a reversal pattern such as a double top or double bottom, it is a good idea to exit your open positions, instead of predicting the new big move with a new position.

 

So, when trading reversals, it is a good idea to do multiple timeframe analysis to get the big picture. Otherwise, there is a chance the you will end up trading against a strong trend of the higher timeframe. Furthermore, since trend is your friend and since trend is where most money is made, it is a good idea to trade the reversal of a pullback, instead of trading the reversal of the entire trend. This way, you will have a higher chance of making money in trading. 

 

That’s all. Now you know more about reversal trading. Like the video if you liked it, subscribe and ring the notification bell to see more trading videos. Check out other videos on the Trading Rush channel to see more videos like these. You should check out the 5 steps trading strategy that can help you make more money as a day trader. And thanks for supporting the Trading Rush channel on Patreon. You are awesome!