So, you've heard about the reversal strategy, huh?
Well, let me tell you, it's a pretty neat approach that can be quite useful in your trading.
Have fun experimenting, and who knows – you might just discover a whole new world of possibilities. Happy reversing! 😄
Okay, first off a reversal is nothing more than when the price of a currency pair, for example, reverses its direction.
So let’s try reversal trading strategy using USDCAD currency pair.
When trading reversals we are going to use multiple timeframes, it is going to be 1 Hour and 4 Hour time frames to place our actual trades and daily timeframe - to spot the reversals.
The first thing we want to look for when trading reversal strategy, is that we are in line with a higher time frame (daily chart), and only then we will turn to lower time frames (1 Hour, 4 Hour chart) to place our trades.
For example, when we are looking on USDCAD price chart, we can clearly see the downtrend and we are looking for the reversals downside (bearish reversals), here is why.
Because what we are trying to capture on a lower time frame is the point of reversal, which is the end of pullback on the daily chat while we are on a downtrend.
In simple terms, what we want and the reason why we want to be aligned with this trend, is because on the daily chart when we are in this downtrend on a lower time frame it will be an uptrend, which then will reverse and that is the point of entry we are trying to catch.
The second thing we are going to look for is area of value (previous level of support).
And the third step would be switching to the lower time frame and look for some kind of selling pressure to capture the next big impulsive move to the downside in our daily chart trend.
Dropping down and placing our trade on the lower time frame will create a bigger risk reward ratio, plus this way we would have a better and more accurate entry point.
On a 1 Hour chart the price pulled back and tested previous lower low and formed a Shooting star candlestick which is followed with bearish engulfing pattern, was a good indicator of a selling pressure and a possible entry point for short position. Our R/R (risk reward ratio) thanks to switching to the lower time frame is now bigger 1/3.4.
There is also a triple top chart pattern, you can see it on the chart above which is a type of chart pattern used to predict the reversal in the movement of a price. So if we had waited for this pattern to emerge, we could've entered with an even bigger risk/reward ratio.
In conclusion I would like to mention one more time these three important steps for this strategy;
- We are looking to stay in line with the trend on the daily chart
- Next we are going to look for the area of resistance/support to spot potential reversal.
- Next we will drop down to a lower time frame and look for signs for the uptrend/downtrend for entry.
And remember this strategy as any other will not work every single time, as I mentioned in previous articles, there is no universal profitable strategy that will work all the time. Always backtest the strategy, try it on a demo account and only then if you are comfortable with the win/lose numbers try it on a real account.
If you liked the strategy go ahead and try it.