Forex Reversal Indicators? Reversals happen at least thrice a week and during those periods some account gets “blown.” At least once every two days during the week, confused trader email their mentors because they got hit by a wave – reversal. If you don’t know what reversal is in forex, then this simple definition will make it clear.
Reversals are simply changes that happen in the overall market trend. Have you ever seen a river that flows in one direction? It moves in a certain direction and suddenly reverses. It is the same with the forex market. Price tends to move in a particular direction (upward or downward) and suddenly because of certain factors, it changes direction. For an upward trend, it can change to a downtrend.
The question now is how can one spot when this reversal is about to take place? For a newbie, it is a daunting task but if you are a professional trader, you can easily spot these changes. Yes, you don’t need a holy grail because these trend reversals is clear as day and night. In this article, you will learn important forex reversal indicators to help you know when such reversal is about to happen.
Before we begin, strip yourself of any confusion because you don’t require any calculation or work. All you need is the forex reversal indicators and how to use them properly. Remember, it is one thing to know an indicator and another to use it effectively.
What Information Does a Reversal tell?
Reversals normally happen during intraday trading and occur quickly than expected. They can also take place within days, weeks, and years. Interestingly, they aren’t limited to a particular timeframe. This means that whatever kind of trader you are, you can avoid reversal.
A downtrend can reverse and become an uptrend. A downtrend is a series of lower highs and lower lows whereas an uptrend is a series of higher highs and higher lows. You can decide to use price actions or alternative use forex reversal indicators as many prefer. Furthermore, besides using indicators, another means of spotting reversals is by using trendlines. The truth is reversal isn’t easy to spot because of pullbacks and noise in the market.
Best Forex Reversal Indicators
Forex reversal indicators help generate reversal signals; however, these signals are not 100% accurate. If it were to be 100% accurate, traders would be making a million-dollar daily. The market is too complex for forex reversal indicators to accurately predict the event of things. Notwithstanding, the forex reversal indicators explained in this post can help swing the probability to your favor. Let us take a look at three important forex mt4 indicators for your trading.
Moving Average Indicator
One of the best tools available to know when a reversal is about to happen is the Moving Average Indicator. It is used to forecast future price by taking the average closing price. There are three types of moving averages with each having its level of smoothness. To use the moving average to ascertain when a reversal is liking to happen, you need certain parameters.
Don’t depend on using one moving average line because you will have false signals. However, to spot reversal, you need multiple moving averages, which must fan out in a certain manner to indicate that reversal is about to take place.
To paint the clearer picture, look at the chart above. In the chart, there are three simple moving averages with different periods. We have the 100 Moving average (blue), 35 moving average (green), and 15 moving average (red). In the chart, we are trading the GBP/USD pair on a one-hour timeframe. The blue moving average indicates the overall direction of the market price of GBP/USD. Nevertheless, the price broke through the 100 moving average several times thereby confusing new traders while generating false reversal signals.
However, with the 35 and 15 moving averages, you can get a precise point when a reversal is about to happen. Let us outline how you can spot the reversal signals.
• If your candlestick bar closes below the 100, 35, and 15 moving averages and the fastest moving average is below the slower moving averages, then it is indicating a bearish reversal signal. By bearish, we mean the price is on the course of going down. You can see that in the encircled area on the left side of the chart.
• If your candlestick bar closes above the 100, 35, and 15 moving averages with the fastest moving average (100) above the slower moving averages (35 and 15), then this is a bullish reversal signal. See the bullish reversal on the right side of the chart
Another important trend reversal indicator in your arsenal is the MACD. Although it doesn’t hold a candle like moving averages, however, it shows how powerful a trend is. To show how you can spot reversal with this indicator, we will use EUR/USD currency pair on a four hour (H4) chart with the following MACD parameter (5, 100, 5). The MACD has a histogram represented by the green line while the dotted red line crossing it is the signal line. Whenever the red line crosses the zero level, it is an indication of a good reversal signal. The two lines must cross the zero level. The only time you have a valid trade is when the histogram and red line crosses the zero level.
Note that this indicator is a lagging indicator. This means it doesn’t react to price quickly, however, you can use it to identify price reversal points.
In our final list of forex reversal indicators is the stochastic indicator, which indicates the beginning and end of a reversal. Unlike the aforementioned forex reversal indicators, the stochastic oscillator indicator generates reliable reversal signals. From the chart below, you can see the currency pair, timeframe, and stochastic line (250, 3, 3). Whenever the line crosses above the 80 level, it is an indication that a bearish trend is about to happen. Furthermore, when it crosses the 20 level, it indicates a bullish trend.
Last Words Forex Reversal Indicators
Forex reversal indicators help in showing you the current trend of the market. They help in signaling the breakout of a relevant support level. Notwithstanding, it doesn’t always mean that once these indicators give these signals, a trend is certain. However, you can use these forex reversal indicators on your demo chart to master how to navigate through the false signals. If you don’t know where to start then we suggest you check out our Best Metatrader Indicators page.