Understanding Technical Analysis in Forex
Chapter 1 : What are Fibonacci Retracement Levels?
Fibonacci retracement levels are considered a predictive technical indicator that works on the theory that after price begins a new trend direction, the price will often return – or retrace – partway back to the previous price level before resuming in the original direction.
Forex traders use these Fibonacci retracements as potential support and resistance areas and they believe that it works best when the market is trending.
The idea is to go long (buy) on a retracement at a Fibonacci support level when the market is in an UPTREND.
And to go short (sell) on a retracement at a Fibonacci resistance level when the market is in a DOWNTREND.
So in practice, the numbers and formulas that feed into your retracement levels may allow you to predict future price points.
Finding Fibonacci Retracement Levels
In order to find and apply Fibonacci levels to the chart, you’ll need to identify Swing High and Swing Low points.
A Swing High is a candlestick with at least two lower highs on both the left and right of itself.
A Swing Low is a candlestick with at least two higher lows on both the left and right of itself.
- For downtrends, click on the Swing High and drag the cursor to the most recent Swing Low.
- For uptrends, do the opposite. Click on the Swing Low and drag the cursor to the most recent Swing High.
It will look something like this.
Fibonacci Retracement Levels in an Uptrend
You can see that we plotted the Fibonacci levels on the swing low at 0.6955 on 20th April and dragged the cursor to the swing high at 0.8264 on the 3rd June.
Let’s use this daily AUD/USD chart as our example of using Fibonacci Retracement Levels in an uptrend.
Once we’ve done that, the charting software (MT4) showed us the retracement levels.
As you can see, the retracement levels were 0.7955 (23.6%), 0.7764 (38.2%), 0.7609 (50.0%), 0.7454 (61.8%), and 0.7263 (76.4%).
Now, we were expecting the AUD/USD to retrace from the recent high and find support at one of the Fibonacci retracement levels because traders would be placing buy orders at these levels as price pulls back.
Let’s have a look at what happened next.
The price pulled back right through the 0.7955 level and continued to shoot down over the next couple of weeks.
It even tested the 0.7764 level but it was unable to close below it.
Then sometime around 14th July, the market resumed its upward move and eventually broke through the swing high.
So if you were to buy at the 0.7764 (38.2%) Fibonacci level, it would quite clearly made a profitable long-term trade.
Fibonacci Retracement Levels in a Downtrend
Let’s use this daily EUR/USD chart as our example of using Fibonacci Retracement Levels in a downtrend.
You can see that we plotted the Fibonacci retracement levels on the swing high at 1.4195 on 25th January and dragged the cursor to the swing low at 1.3854 on the 1st of February.
Once we’ve done that, the charting software (MT4) showed us the retracement levels.
As you can see, the retracement levels were 1.3933 (23.6%), 1.3983 (38.2%), 1.4023 (50.0%), 1.4064 (61.8%) and 1.4114 (76.4%).
Now, we were expecting the EUR/USD to retrace from the recent low and potentially encounter resistance at one of the Fibonacci retracement levels because traders who want to play the downtrend at better prices may be ready with sell orders there.
Let’s have a look at what happened next.
The market did try to rally, stalled below the 1.3983 (38.2%) level for a bit before testing the 1.4023 (50.0%) level.
If you had placed orders at the 38.2% or 50.0% levels, you would have made some mad pips mate!
In our two examples above, we were lucky enough to find some temporary support and resistance at Fibonacci retracement levels.
However, it is important to remember that while Fibonacci retracement levels give you a higher probability of success, price won’t ALWAYS bounce from these levels, and these levels should be looked at only as areas of interest. Not definite indicators.
And that brings me to our next topic. In the next lesson, we will show you why it is important to hone your skills and combine the Fibonacci retracement with other tools, such as support and resistance levels and candlesticks, to give you a higher probability of success.
How to Use Fibonacci Retracement with Trend Lines? [EXPLAINED]
As you already know, Fibonacci retracement levels work best when the market is trending.
So what better tool to combine it with other than TREND LINES.
Trendlines being such an important part of technical analysis, when combined with the Fibonacci indicator, can produce trades that have the HIGHEST probability of winning.
Let me show you how this can be done.
Combine Fibonacci Retracement with Trendlines
The main aim of the Fibonacci retracement is to signal the most reliable support and resistance levels.But what if I told you that you can confirm the signal by drawing a trend line.
And if the trend line and the Fibonacci levels collide, this point may become the most forceful support or resistance level.
Let’s recap how you can do this in practice. Stick to the following 5 points and you can’t go wrong.
- Rule #1 Find a Trending Currency Pair
- Rule #2 Draw a Trend Line
- Rule #3 Draw Fibonacci From Swing low to swing High
- Rule #4 Wait for the Price level to Hit Trend Line
- Rule #5 Place your trade
- Rule #6 Withdraw your $$$$
Combining Fibonacci with Trendlines on a Forex Chart
Here’s a Monthly chart of EUR/USD.
As you can see, the price has been respecting a short-term rising trend line over the past month.
If you look even closer, you’ll see that we plotted the Fibonacci retracement levels by using the Swing Low and the Swing High.
Notice how the Trendline and Fib levels intersected at 61.8%?
Could these levels serve as potential support levels? There’s only one way to find out!
If you had set some orders at that level, you would have had the perfect entry!
And that’s what the combination of a diagonal and a horizontal support or resistance level can do!
Using Fibonacci Retracement Levels with Support and Resistance
As we mentioned in the previous chapter, while the Fibonacci retracement tool can be super useful, it should NOT be used all by its lonesome self.
Instead, combining Fibonacci retracement tool with other indicators can help you increase your chances for profits.
Seriously, it can make wonders when combined. It’s like comparing it to the football legend Lio Messi.He is one of the greatest footballers of all time, but he couldn’t have won all those titles by himself.He needed some backup… or shall we say support?
Similarly, the Fibonacci retracement tool should be used in combination with other tools.
Anything to tilt the odds in your favour… AM I RIGHT?!
Ready to get this pip show started?
Fibonacci Retracement combined with Support and Resistance
Trading using Fibonacci retracement with support and resistance is quite easy.
All you have to do is to wait for zones where both collide.
If Fibonacci levels are already support and resistance levels, and you combine them with other price areas that many other traders are watching, then the chances of price bouncing from those areas are much, MUCH higher.
But that’s enough talk. Let’s see what combining support and resistance levels with Fibonacci levels. looks like on an actual Forex chart. Below is an hourly chart of EUR/USD.
Looks like it’s in a downtrend, right?
Maybe you’re thinking you want to get in on this short EUR/USD bandwagon.
But the question is, when and where should you enter…
Time to bust out your Fibonacci retracement tool and set your Swing Low and Swing High.
The chart looks much sexier with those Fibonacci levels anyway, doesn’t it?
If you look closer, you can see that the 1.13479 price was a strong support level and it just happens to coincide with the 38.2 Fibonacci retracement level. A good place to sell? I would say so.
Trust, but verify.
Let’s see what would have happened if you had placed an order around that level.
You can do the same setup on an uptrend as well. The point is to look for price levels that seem to have been areas of interest in the past.
If you think about it, there’s a higher chance that the price will bounce from these levels.
- Firstly, with traders looking at the same support and resistance levels, there’s a good chance that there will be a number of orders around those levels.
- Secondly, with many traders using the Fibonacci retracement tool, there is a big chance they are looking to jump in on these Fibonacci levels themselves.
And whilst there is no guarantee that price will actually bounce from these levels, you can at least have more faith in your trade.
At the end of the day, trading is all about probabilities and if you combine the two analysis tools, the chances are that the signals you get are more reliable.
If you stick to those higher probability trades, then there’s a better chance you’ll come out the other (better) end.
Using Fibonacci Retracements To Place Stop-Loss
We have now paired the Fibonacci levels with various technical tools to find trading opportunities.
These include Support & Resistance, Trendlines and even Candlestick Patterns.
In the previous lesson, we also saw how to place accurate ‘take-profit’ orders to maximise our profits.But the uses of the Fibonacci levels don’t stop there.
In this lesson, we’ll show you how to set your stop-loss when you decide to use the Fibonacci levels.
Remember stop loss orders?
The little lines that ensure that you don’t explore yourself to the risk of losing all your money on a single order?Yeah, it’s always good to know where to place them.
If you don’t, you’ll end up blaming the poor Fibonacci.
- Place Stop Loss Past Next Fib
The proper placement of the stop-loss order is crucial and so the Fibonacci tool can be a great help to traders in determining appropriate stop-loss levels.
The first method is to place a stop right after going through Fibonacci.
Meaning if you planned to enter at the 38.2% Fibonacci level, then you’d place your stop loss past the 50% Fibonacci level.
If you planned to enter at the 50.0% Fibonacci level, then you’d place your stop loss past the 61.8% Fibonacci level.
If you planned to enter at the 61.6% Fibonacci level, then you’d place your stop loss past the 78.6% Fibonacci level.
And so on.
Let’s take a look at an M30 GBP/USD chart.
If you had shorted at the 38.2% you could have placed your stop loss order just past the 50.0% Fibonacci level.
The reasoning behind this method of setting stops is that you believed that the 38.2% level would hold as a resistance point. Therefore, if the price were to rise beyond this point, your trade idea would be invalidated.
The problem with this method of setting stops is that it is completely dependent on you having the perfect entry.
Setting a stop just past the next Fibonacci retracement level assumes that you are confident that the support or resistance area will hold. And, as we pointed out earlier, using drawing tools isn’t necessarily science.
You never —really— know. The market might shoot up, hit your stop, and eventually go in your direction. This is usually when you’d put a sad playlist on and turn the shower on.
We are not saying that this will happen.But it might.
Only use this type of stop placement method for short-term, intraday trades.
- Place stop loss past recent swing high & swing low
Now, if you like to be a little safer, another way to set your stops would be to place them past the recent Swing High or Swing Low.
For example, when the price is an uptrend and you’re in a long position, you can place a stop loss just below the latest Swing Low which acts as a potential support level.
When the price is in a downtrend and you’re in a short position, you can place a stop loss just above the Swing High which acts as a potential resistance level.
Traders believe that this type of stop loss placement gives your trades more room to breathe and therefore a better chance for the market to move in favour of your trade.
If the prices were to go past the Swing High or Swing Low, it might indicate that a reversal of the trend is already in place. This means that your trade idea or setup is already invalidated and that you’re too late to jump in.
Option 1 vs Option 2 – which is better?
The truth be told, it is completely up to you to decide which method you to go for.
Just remember that neither of the methods is a sure thing and you shouldn’t rely solely on Fibonacci levels as support and resistance points as the basis for your stop-loss placement.
But what both of the methods can do, when combined with other tools, is tilt the odds in your favour, give you a better exit point, more room for your trade to breathe, and possibly a better reward-to-risk ratio trade.
Using Fibonacci Retracement with Candlesticks
By now, you know how to combine the Fibonacci retracement tool with support and resistance levels and trend lines to create a simple but super awesome trading strategy. In this chapter, we will show you how to use Candlestick patterns at Fibonacci retracement levels, and what you should be looking for.
The Fibonacci Candles
As you already know, candlestick patterns tend to be reliable signals of a reversal in price action.
Therefore reversal candlestick patterns at Fibonacci retracement levels portray a strong signal that price is likely to change direction.When combined together, the goal is to look for exhaustive candlesticks.
It’s simple. If you can tell when buying or selling pressure is exhausted, it can give you a clue of when price may continue trending.
Below is a 4-hour chart of EUR/USD.
The pair seems to have been in an uptrend for the past couple of hours, but the move seems to have paused for a bit.
Will there be a chance to get in on this uptrend?
Let’s put the Fibonacci retracement tool to work!
As you can see from the chart, we’ve set our Swing Low and Swing High and drew Fibonacci retracement levels.
We can clearly see a candlestick pattern formation on the Fibonacci levels. It seems that it formed a bullish engulfing pattern.
Confirmation for a buy signal?We’d say so!
Let’s take a look at what happened afterwards
You can see the level held well and the market continued to move to trade profit direction.
If you had placed your order anywhere around the Fibonacci levels, you wouldn’t have been disappointed!
This just comes to show that when you combine the Fibonacci retracement tool with candlestick patterns, you automatically increase your chances for a winning trade.
Fibonacci Cheat Sheet [DOWNLOAD]
Let’s recap what we’ve learned about trading using the Fibonacci retracement levels.
First and foremost, the Fibonacci retracement tool is a predictive technical indicator that Forex traders use to identify the potential support and resistance areas. The tool can be applied to any time frame and any type of Forex chart.
The key Fibonacci retracement levels to keep an eye on are: 23.6%, 38.2%, 50.0%, 61.8%, and 76.4%.
Before you can apply Fibonacci levels to your charts, you need to identify Swing High and Swing Low points.
- A Swing High is a candlestick with at least two lower highs on both the left and right of itself.
- A Swing Low is a candlestick with at least two higher lows on both the left and right of itself.
- For downtrends, you’d on the Swing High and drag the cursor to the most recent Swing Low.
- For uptrends, you’d click on the Swing Low and drag the cursor to the most recent Swing High.
And that’s it…. well in a nutshell anyway. If you skipped the previous lessons, then I would definitely recommend you read through them.
To help you memorise all of the above, we have prepared a cheat sheet with everything Fibonacci to help you along the way.
Chapter 2 : Divergence
In trading, divergence happens when the price of an asset and the indicator you’re looking at are moving in opposite directions. In other words, when the price of an asset is out of sync with the corresponding indicator’s readings, a divergence signal occurs.
In normal market conditions, the price action of an asset and the technical indicator moves in the same direction. In other words, when the price prints a new high, the technical indicator should print a new high as well.
Similarly, when the price prints a new low, the technical indicator should print a new low. However, when this type of convergence gets out of sync, we get a divergence.
For example, we have a divergence signal if the price moves up, but the indicator moves down or vice-versa.
As you have noticed, divergence is not a technical indicator per se, but it’s a trading concept. There is no mathematical formula to calculate divergence, but they are visual tools on the price chart.
The main purpose of divergences is to signal momentum building up into a trend and give early reversal signals when there is a slowdown in the momentum readings.
Divergence doesn’t say when the reversal will happen, but it’s an early warning sign that the price might actually reverse soon.
The opposite of divergence is convergence.
Convergence happens when the price of an asset and the indicator you’re looking at is moving in sync in the same direction. For example, if the price of an asset is making a new higher low, the indicator should follow the price and print a corresponding higher low.
How Does Divergence Work?
To really dig deeper into the market, traders need to understand the foundation of how price in any market moves.
At the core, asset prices move in a series of higher highs and higher lows when we’re developing an uptrend. Conversely, when we’re developing a downtrend, asset prices move in a series of lower lows and lower highs.
The concept of successful trading is to buy low and sell high. In other words, you have to buy when the price is making a new low and sell when the price makes a new high.
The concept of divergence can help traders distinguish when it’s a good idea to buy at a new low and sell at a new high. This is done by studying the divergence signals – the mismatch between the price and the technical indicator.
The only limitation of divergence is that it doesn’t provide timely trade signals. The divergence signal can persist longer without price changing direction.
Broadly speaking, there are two types of divergence signals:
- Regular divergence is also known as the classic divergence.
- Hidden divergence.
Divergence Cheat Sheet Table
The divergence cheat sheet table below outlines the different types of divergence and the signals they generate.
Regular divergences can be further classified into regular bullish divergence and regular bearish divergence:
Regular bullish divergence happens when we have a disagreement between prices that are falling (making lower lows) and a technical indicator that is rising (making higher lows).
Regular bearish divergence happens when we have a disagreement between prices that are rising (making higher highs) and a technical indicator that is falling (making lower highs).
The regular bullish divergence is an early sign that the prevailing downtrend will change direction and turn to the upside. In this regard, the regular bullish divergence is a buy signal.
Conversely, the regular bearish divergence is an early sign that the prevailing uptrend is about to change direction and turn to the downside. In this regard, the regular bearish divergence is a sell signal.
The image below outlines side-by-side the difference between the regular bullish divergence and regular bearish divergence.
The ideal place where a regular bullish divergence can develop is at the end of a downtrend. This type of divergence then naturally leads to an uptrend.
Conversely, the ideal place where a regular bearish divergence can develop is at the end of an uptrend. This type of divergence then naturally leads to a downtrend.
Hidden Bullish Divergence
The hidden divergence doesn’t differ that much from the regular divergence. For a hidden divergence to happen, we need to see a mismatch between the price and the technical indicator similar to regular divergence.
However, while regular divergence signals a possible trend reversal, the hidden divergence signals the possibility of trend continuation. Hidden divergences tend to develop within an existing trend.
Usually, hidden divergences indicate that the prevailing trend is still strong enough to resume itself.
Just like the regular divergence, we can distinguish two different types of hidden divergence:
- Hidden bullish divergence.
- Hidden bearish divergence.
Hidden bullish divergence happens when the price is making a higher low, while at the same time, the indicator is making a corresponding lower low.
The hidden bullish divergence is an early sign that the prevailing uptrend is ready to resume.
Usually, the hidden bullish divergence signal develops after prices have pulled back, and now the bulls are ready to control the market again. In this regard, the hidden bullish divergence is a buy signal.
The image below outlines side-by-side the difference between the hidden bullish divergence and hidden bearish divergence.
Usually, the hidden bullish divergence can be observed in uptrends.
Hidden Bearish Divergence
Hidden bearish divergence happens when the price is making a lower high, while at the same time, the indicator is making a corresponding higher high.
The hidden bearish divergence is an early sign that the prevailing downtrend is ready to resume. Usually, the hidden bearish divergence signal develops after prices have pulled back, and now the bears are ready to control the market again. In this regard, the hidden bearish divergence is a sell signal.
Usually, the hidden bearish divergence can be observed in downtrends.
Finding hidden divergences is more difficult because they don’t occur as often as the regular divergence. However, hidden divergences can tell traders in advance when the prevailing trend is ready to resume.
In a nutshell, the hidden divergence occurs simultaneously with short-term retracements in the price. In other words, the hidden divergence signals the potential end of a pullback.
- Hidden bearish divergence – the end of a pullback in a downtrend.
- Hidden bullish divergence – the end of a pullback in an uptrend.
Before recognizing regular divergence and hidden divergence and the possible trend reversal or trend continuation signals, traders need to pick a technical indicator.
Usually, momentum oscillators like the RSI, Stochastic, MACD, etc., are often used by retail traders to spot those instances where the price of an asset and the indicator fails to converge.
The same way the price of an asset moves up and down, establishing peaks and valleys, technical indicators converge or diverge from the price making equivalent peaks and valleys.
Some technical indicators can be applied directly on the price chart or in a separate window, usually below. Traders can use any oscillator to identify divergence.
The MACD, stochastic, and RSI indicators work best to identify regular divergence.
In contrast, the money flow index (MFI) is a better alternative to identify hidden divergence. This is true because the money flow index is a trend following indicator.
One of the most popular technical indicators to spot regular divergence and hidden divergence is the Relative Strength Index (RSI) indicator.
The Relative Strength Index (RSI) is a leading technical indicator which means it can precede the price movements. This means that the RSI divergence is a leading indicator of price action.
An image of the RSI indicator is presented below.
With the RSI indicator, traders can identify both regular divergences and hidden divergences.
However, the RSI divergences can’t be used as a timing tool. In this case, candlestick chart patterns can act as a great confirmation signal for the resumption of the prevailing trend (in the case of RSI hidden divergence) or the trend reversal (in the case of RSI regular divergence).
Traders can look for long positions if they spot regular RSI bullish divergence or hidden RSI bullish divergence. Conversely, traders can look for sell positions if they can identify regular RSI bearish divergence or hidden RSI bearish divergence.
Bullish Divergence RSI
The chart below outlines the regular bullish RSI divergence.
In this example, traders can see that the price is making a new lower low compared to the previous swing low point on the price chart. At the same time, the RSI indicator prints a higher low relative to the previous low printed on the RSI oscillator.
After forming the lower low on the price chart, the prevailing trend reversed from bearish to bullish.
The RSI indicator can also help traders spot bullish hidden divergences. The example below shows price trading in an uptrend. Comparing the swing lows in the price with the swing lows printed on the RSI oscillator, hidden bullish divergence is developing on the price chart.
After forming the higher low on the price chart, the prevailing trend resumes and moves to new highs.
It’s crucial to understand that the bullish hidden divergence can develop in any place within the uptrend as long as all the technical conditions are satisfied.
Bearish Divergence RSI
The price makes higher highs in a regular bearish RSI divergence, but the RSI oscillator prints lower highs.
In the example below, traders can see that the price is making a new higher high compared to the previous swing high point on the price chart.
At the same time, the RSI indicator prints a lower high relative to the previous high printed on the RSI oscillator. Following the RSI bearish divergence, the price started reversing quickly, and a new trend emerged.
The RSI indicator can also help traders spot bearish hidden divergences.
The example below shows price trading in a downtrend. Comparing the swing highs in the price with the swing highs printed on the RSI oscillator, a hidden bearish divergence is developing on the price chart.
Following the hidden bearish divergence, the prevailing bearish trend continued to the downside.
In summary, traders need to know that regular divergence signals a trend reversal, while at the same time, the hidden divergence signals a trend continuation.
Trend following traders are better off focusing on identifying hidden divergence as this will help them ride the overall market trend. Because the hidden divergence is a trend continuation signal, out of the two types of divergence, the hidden divergence carries a higher rate of success.
Last but not least, trading divergence works across all time frames; however, the higher the time frame is, the more reliable the divergence signal tends to be.
Chapter 3 : Relative Strength Index
The relative strength index is commonly called the RSI and is a technical analysis indicator that can help show you the momentum of a market.
The relative strength index indicator is an indicator that adds an oscillator to your chart.
This oscillator rotates between 0 and 100. The two main levels traders keep an eye on with the RSI are the 30 and 70 numbers.
When the price starts moving above the 70 level, it is thought that the price is overbought. On the other hand, when the price moves below the 30 level, it is thought that the price is oversold.
Using these levels, you can start to predict potential market reversals when the price is either overbought or oversold.
How to Use the RSI
The RSI will rise as the amount of positive closes increases. On the other hand, it will fall as the amount of losses increases.
The relative strength index will smooth out this information and give you a very easy-to-read oscillator that moves higher and lower.
You can read about how exactly the relative strength is calculated here, but when using an indicator, all of these calculations are carried out for you, and all you need to worry about are the key levels.
The relative strength index was created in 1978 and is now one of the most popular indicators for price action and technical analysis traders.
You can use the RSI to both find and manage your trades, and we will discuss, you can combine it with other trading strategies.
The RSI is so popular and used widely throughout the markets because it is straightforward to add and start using in your own trading.
Relative Strength Index Trading Strategies
When you add the RSI indicator to your chart, you will be given an oscillator that moves higher and lower.
The two main levels we watch when using the RSI are the 30 and 70 levels.
For bullish reversals, we are looking to see when the price starts moving below the 30 level. This indicates that the price is oversold, and a potential reversal back higher could be on the cards.
For bearish reversals, we are looking to see when the RSI starts moving above the 70 level. Movement above the 70 level could indicate that the price is overbought and is looking to make a bearish reversal back lower.
In trending markets, you will often notice that the RSI moves in a band or range and not showing overbought or oversold conditions.
In the chart example below, you can see the price has been in a trend lower, but the RSI stays between the 30 and 70 bands.
RSI Indicator Buy and Sell Signals
Whilst the relative strength indicator is great at finding overbought and oversold levels in the market, it can also be used to find buy and sell trading signals.
The best way to find buy and sell signals with the RSI is to combine it with other technical analysis strategies to confirm a potential trade.
One of the simplest ways of doing this is using the RSI at key levels in the market. These can be support and resistance levels or other areas of importance.
In the example below, price is moving into a key resistance level. This is a major level and a level we could be watching for potential short reversal trades. When we look at the RSI, we see that price is moving above the 70 level, indicating overbought conditions and a potential reversal back lower.
Using these two pieces of information, we could make a short trade and price as the price moves back lower and away from the resistance level.
If you wanted to add even more confirmation to your RSI trading signals, you could look to add Japanese candlesticks or other key indicators.
Using the Relative Strength Indicator in MT4 and MT5
Using the relative strength indicator in MT4 and MT5 is very easy, and after you have added it, you will have the oscillator at the bottom of your charts.
To add the RSI to your Metatrader charts, follow these instructions;
- Open your MT4 or MT5 charts.
- Click on the “Insert” button at the top of your charts.
- Select “Indicators” and then the Relative Strength Index.
- A box will then open, allowing you to customize the RSI indicator how you would like to use it.
See the example below for where you can find the RSI indicator in your MetaTrader charts.
Chapter 4 : Trend Reversal Patterns
There are many ways you can start to identify trend reversals. One way price action traders will spot new potential trend reversals is with price action patterns that are forming through the price action.
These patterns range from one and two candlestick patterns such as the engulfing bar pattern to larger patterns such as the 1,2,3 trend reversal pattern.
The example below shows a 123 reversal pattern in play. First of all, the price had been in a trend higher. We can then see price forms a new leg lower followed by a new lower high, and to complete the pattern, the new lower low showing momentum has changed to the downside.
The Best Trend Reversal Indicators
One of the simplest ways to find market reversals is using trendlines.
With trendlines, you are either looking for a bounce or a break. A bounce is when price holds as that trendline, and the trendline acts as either support or resistance.
The example below shows that price continually moves lower into the trendline before it holds as support and bounces with a reversal.
Following on from trendlines are channels.
Channels are very similar to trendlines. However, the difference is that you have two trendlines running in a channel, either higher or lower.
You can use channels in the same way you use trendlines, looking for price to make a reversal when the channel’s high or low is touched.
In the example below, we have a channel moving higher. As the channel high is touched by the price, we can see a reversal back lower. As the channel low is touched, we can see a reversal back higher.
Moving Averages are one of the most popular indicators across many different market types. You can use them on all time frames, and they are very flexible.
The idea of using moving averages is to smooth out the price action information and give you an overall idea of the trends direction. However, you can gain more information than just the overall trend.
When using multiple moving averages, you can identify when a trend is changing and when a trend is gaining momentum.
You can also use moving averages to identify potential areas of dynamic support and resistance as the moving average moves higher or lower.
The MACD is a momentum indicator that you can use on all of your favourite market types.
This indicator gives you buy and sell signals, and it can also help you identify when a market is overbought or oversold.
You can use the MACD to identify bullish and bearish momentum and to find and manage your trades.
Zig Zag Indicator
The Zig Zag indicator is one of the more simple indicators that you can use in your trading. When applied to your charts, the Zig Zag indicators will plot lines on your charts showing you the clear swings higher and lower. It will filter out the small and minor price action and only show the clear overall moves.
With this indicator, you can filter out as much of the noise as you would like so that only the more significant swings are shown. This can help you find overall bigger moves and not jump on every small swing higher and lower.
You can use the Zig Zag levels to find obvious trends, potential changes in momentum, mark clean support or resistance levels, or help with your other technical analysis.
The Best Trend Reversal Indicators for Intraday
Whilst trend reversal trading on the intraday charts can be a riskier trading strategy; it can also come with higher rewards. If you can enter a trend when it is first beginning, you have the chance to make far higher reward winning trades.
Some of the best and highest probability intraday strategies for trend reversals are when you combine multiple indicators or methods.
For example, see the chart below. This chart has combined multiple moving averages. The first is a longer-term 50 period moving average, and the second a faster reacting 21 period moving average.
When we see the faster moving 21 period moving average cross above the 50 periods, we can begin to look for new long trades with the trend higher. As the moving averages begin to widen, we also see that the momentum higher is gaining.
To further increase our chance of making a winning trade, we could use other strategies like candlestick patterns or waiting for the price to test the moving averages as dynamic support to make a long trade.
Trend Reversal Indicator MT4
This MT4 trend reversal indicator is a non-repainting indicator that looks to capture new trend reversals.
This indicator looks to find the key swing highs and lows and give you clear buy and sell signals.
The trend reversal MT4 indicator comes with a clear set of instructions and also has built-in alerts.
This is a premium indicator that comes with a demo you can try for free, and you can test it out here; MT4 trend reversal indicator.
Trend Reversal Indicator MT5
This is a MT5 trend reversal indicator that uses simple bullish and bearish price patterns.
- Bullish Reversal: Two bearish candlesticks followed by one bullish candlestick. The third candlestick’s close exceeds the high of the previous candlestick.
- Bearish Reversal: Two bullish candlesticks followed by one bearish candlestick. The third candlestick’s close price is lower than the low of the previous candlestick.
This indicator comes with a range of inputs and settings and allows you to create custom Metatrader notifications.