It is very important for you to know when the price is going to reverse or retrace as it will be able to alert you to exit your current position before the market takes it back or it can also alert you to enter a trade to trade the reversal.
Therefore in this post today, I will be sharing with you several indicators that I use to identify possible reversal or at least a retracement. As usual, these indicators will not be able to identify reversal 100% of the time as trading is a game of probability but they are pretty accurate.
1) MACD Indicator – One of the way I use the MACD indicator to identify a reversal is its histogram. When you are in an upward movement and you see the MACD histogram shortening, it is a sign that the buyers are losing strength and a possible reversal is coming.
If you are in a downward movement and you see the histogram shortening below the water line, it is sign that the sellers are losing strength while the buyers are gaining strength.
2) CCI Indicator– As for the CCI, I will usually use the 200 mark as a sign of reversal. When the price crosses above the 200 level, I will wait for it to move back down to the 100 level before I enter a reversal trade.
If it goes below the -200 mark, I will wait for it to move up to the -100 mark before I enter a trade.
Besides the above 2 indicators, I also make use of some candlestick patterns to help me in the identification of possible reversal.
1) Spinning Top – The spinning top is made up of a short body with long wick at the top and bottom. This is usually a sign of indecision among the buyers and sellers.
If it occurs at the end of a strong trend, it is usually a sign of possible reversal.
2) Railway Track – I have written a post on this railway track candlestick pattern and you can read it here. The railway track is a sign of traders getting into the wrong position and the 2 long opposite candles are formed as traders quickly exit their wrong position and enter the opposite side.
If you happen to see the indicators showing the same reversal signal together with the formation of any reversal candlestick patterns, this will greatly increase the chance of the price making a reversal.
If you have any recommendation for reversal indicators, do feel free to comment below as your input will be very useful for everyone here.