How To Quickly And Easily Identify Trend Reversal in Forex

How To Identify Trend Reversal in Forex

Struggling to spot trend and identify trend reversal?

Discover How To Quickly And Easily Spot Trend In Forex

When I first started trading. I’m thrilled because I am building a dream. A dream to quit my offline business and venture into an online trading lifestyle.

A lifestyle that allows me to be anywhere in the world. I won’t be bound by location and my income is dependent on myself.

I do not need to sell. I do not need to find clients. I do not need to serve.

I was thinking how could I do the above until I learn about Forex.

There is one killer setup that most retail traders blow up their accounts within the first year. And that is not cutting losses.

This is especially seen in markets where it trend in one direction. Most beginners would refuse to admit wrong and close the losing position.

This is where drawdown occurs and lead to a margin call. If you want to be a profitable trader and last longer than a year on a tiny account. You had better listen.

What I’m about to show you is years of tears and joy. Hours of experiment and hardship. More often hard work than legwork.

One thing you must remember, the trend is not your friend.

What Is Trend In Forex Trading

Richard D. Wyckoff is the grandfather of all market analysis. He claims there are several trends in a market cycle.

This is the weekly chart.

This is the daily chart as shown below.

Each trend resides another market cycle and in that market cycle lies another trend and so on and so forth.

Most brokers offer the usual 10 types of time frame. While some ECNs let you customise an 8-hour time frame chart.

It is not important.

Most decision made under pressure can have disastrous effects. Most brokers let you choose the time frame you are comfortable in making an informed choice.

When most traders trade in the daily time frame. They are confident in digesting complex information and making an informed choice.

The first is a bullish market. This is where the market or I would like to call it price, makes higher low followed by a new high.

This is also known as an uptrend market.

The second is a bearish market. This is where price makes a lower higher followed by a new low.

This is a downtrend market.

This might comes a bit earlier in the post but it’s important that you understand this. The first 2 image of a trending market is what kills most retail traders.

When I first started trading. This is what causes me to blow up 2 accounts. And because of it, I had to learn how price actually work. It propelled me to be better at reading price action.

The last outcome most market does is a side way trend. This is where neither the bulls nor the bears have any strength to push the direction in any manner.

This is the condition most retail traders lose the least. In other words, this is where beginners make the most amount of money.

The image below shows a range bound market.

The above 3 conditions show what you see in an irrational market. Where volatility and news don’t rattle the anxious traders.

You have no idea how long it took for me to accept this.

That it is OK to buy when the market is going higher and to sell when it has fallen so much.

This habit is counter-intuitive and nobody likes to be the last in the trade. Over time I learned to accept this.

That the market can remain irrational longer than you can remain solvent.

How Often Do Forex Markets Trend

Most trading markets only trend 30% of the time. I do not concur as exotic pairs tend to trend pretty much every day. But in reality, it depends on the time frame you are on.

As shown below. This is EURUSD pair. It trends for 4 weeks.

This is the same pair but it went range bound for 2 months.

And this is the same pair but in a much lower time frame. It trend for a day.

As retail traders, we couldn’t care less about how far the market is trending for. What you need to focus on how much you can make when it is.

How Long Do Forex Trends Last

There are two types of a trending market. Speed and momentum. I learn this from Wayne Mcdonell.

Speed is where greed and anxiety caught traders by surprise. No one knows what is going on but everyone wants to be in it.

A typical market where the speed of the market appears.

News releases tend to attract risk-takers and big dogs. They are the big boys that carry the weight to move a trillion dollar a day giant.

Retail traders have no space where speed appears. We are looking for consistent profits and that depends on competency and predictability.

Luck has no place retail traders. Especially for beginners.

How Long Does A Forex Trend Last

If we can’t be like the big boys what else can we do to be similar?

We expect and intercept their footprints. I’ve mentioned there 2 types of trending market. The next one is momentum trading.

This is where the reaction of the market can be our only edge.

There are investors, traders, and scalpers. Each of them is waiting for the right moment to commit their capital.

The above image shows an ADX.

The indicator in the first window is an ADX. It is a trend following indicator. As the market falls. Momentum picks up. ADX rises and every pullback is lower than the last.

Now you know the 3 common types of market behavior. Do you know market makers leaves a trail of destruction before a breakout occurs?

How To Understand Forex Market Trend

I spent $5k on a trading system that relies on counting pips. It turns out to be a rehash version of a chart pattern.

Over the years I’ve come to realize it’s actually a 123 top or bottom depending on which side of the trend you are on.

The past decades I’ve come across many system and strategies. They relied on indicators and custom software with arrows and alert. But nothing came close to help me achieve my 100% return in less than 10 months.

It turns out there is another guy who is as legendary as Jesse Livermore. His name is Richard Wyckoff. He was the first person to help me understand how the market actually runs.

I know how the market works but I don’t know when to enter.

Have you come across times where a breakout occurs?

You didn’t jump in because you were afraid of a false breakout?

Have you got stopped out only to find if you hadn’t placed your stops?

Could the market have gone your way?

Let me present to you, Wyckoff Market Cycle. His theory on market institutions and workings of market makers are revolutionary.

You will understand where to enter if you are chasing the market and when to enter if you are taking chances.

Source

How To Understand Forex Trend

On the whole, there are only 3 phases a trend would behave. The first is a sideway market. On hindsight, we could only tell if it’s accumulation after the market has made its first uptrend.

Then there is the markup. This is where a breakout to the upside occurs and it’s legit. Price stalls. It hesitates before rising up again.

Markup can occur once or twice or even three times. This is uncommon. Especially if there isn’t any recent resistance to halt its accession.

After the market has ended its course. A sideway market appears.

Depending on the time frame a pullback occurs. This is possible because of distribution.

This is where traders take their profits and sellers step in to push the price down. Most retail traders are more than happy to do a little counter-trend trading.

If the market has enough momentum. A breakout to the downside occurs and the market falls.

A markdown is where late sellers jump in after the market has moved. This pushes price further down and reverse the trend.

It seems easy at first but what kills most retail traders is when a reversal turns into a pullback. The trend doesn’t change and went right back up.

This is where you have to understand what makes a market trend to the upside.

How To Define Forex Trend

There are several ways to define a trend in forex. The easiest way is to use a moving average.

I use a 10 EMA (exponential moving average) to plot on the chart. It helps me identify a trending market. It works on all time frame.

You can use 200 EMA or 55 EMA.

The most important thing to know is they do not define where buyers and sellers are waiting. It is more of a representation of possibilities.

Unfortunately. It doesn’t always get rejected at the line.

A trend in Forex is not hard to tell.

An uptrend consists of a breakout to the upside followed by a pullback. The pullback can be a hesitation candlestick pattern like a doji or a spinning top.

The image below shows a bearish engulfing candlestick pattern. Some traders who trade the pin bars, call it the outside bar.

It can also be a chart pattern known as a double top.

The last one is a chart pattern known as a 123 top.

Which some pattern traders call it half of head and shoulder pattern.

After the pullback, the trend might continue or it will get stalled. Most often it might reverse.

It depends on whether a new high for a bull trend or a new low for a bear trend is forming,

How To read Forex Trend

Let’s recap.

I’ve mentioned in the Wyckoff market cycle, the price goes through accumulation before ascending.

After the price has broken out of the accumulation phase. We get to see a markup.

This is when the price gets more buyers than sellers pushing the price even further up. Late buyers have a chance to jump in.

Not all markups are equal. Some markup fails.

Once market makers have pushed the price to a level they wanted. This is where they start to distribute their goods towards late buyers.

This phase is the distribution phase.

And we have the markdown.

Again. Not all markdown are created equal. But it’s important to remember all trading vehicle goes through the same market cycle.

If you understand this. You can then trade according.

How To Trade Forex Trend

I never surfed before but I can swim pretty well. There is a US-based technique known as the “fishlike” swimming. It teaches you to glide through the water without much effort.

Water has no form. It has no based. The more you fight against the flow. The more you struggle to keep afloat.

If you smash through water at high speed with a flat surface. You can get hurt pretty bad.

The trend in the Forex market behaves like water. This is true when I capture the method and start gliding through the water with speed at a much lower effort.

Momentum carries me forward from then on. When it comes to trading nothing is further from the truth.

Has This Ever Happened To You?

It can be quite frustrating when you put on a trade and it doesn’t go anywhere. The context of the market is in either accumulation or distribution phase.

Nobody likes to be the last. Everyone wants to make the most of every opportunity.

I also learn the market has a good way to shake the amateurs from the professionals.

So I learn to wait for this 2 things. If I’m bullish. I’ll buy when I see strength like a double bottom or a breakout.

This trade happens in the morning as of writing this post.

A breakout to the upside has occurred.

A pullback is imminent but the tricky part is knowing what to look. The 1-hour time frame has less noise but I wouldn’t be able to catch a double bottom here.

The image below shows a markup at play.

Let me show you a double bottom. As you can see from the image above. The arrow shows where late buyers jump in.

Everything goes as planned. The markup gets pushed further up thanks to the efforts of late buyers.

This is an ongoing trade.

As of writing this. I’m waiting for a pullback.

Next example.

As of writing this, the market has run without me and I’m waiting for a pullback. A markdown so I can jump in on the action.

How To Determine Trend Direction

Trading is a game of probabilities and statistics. What had happened before could happen again.

Your best bet is to find a trending market. One that has done either accumulation or distribution and on its second phase.

The image below shows a rather large distribution.

What do you think will happen next?

Yes.

Markdown.

It is not as easy as it looks. Market makers are out to hunt stops and easy money.

The 24-hour session makes it impossible to pinpoint when the trend is going to continue.

Your best bet is to look for weakness to the upside like a double top or strength like a breakdown.

If this is so easy. Why do many retail traders lose money?

FXCM conducted a long duration of test with its clients. They found out one determine factor that wiped out most traders.

The data collected has nothing to do with accuracy. In fact, most retail traders are as accurate as the crystal ball.

The answer later.

How To Determine Forex Trend Direction

The following shows a distribution channel and a markdown. Price seems to show another markdown?

What will you do?

There will be instances where the market does show a markdown twice. But it’s pretty rare.

The next outcome the market does is an accumulation phase. A reversal might followed.

There is no trend only steps market makers do to accumulate lot size and to reach a certain point in the market.

Most retail traders lose money is because they are always on the lookout for tops and bottoms.

I learn to change this perspective and accept the market is going even higher after a breakout.

The problem is are you waiting for a reversal?

How To Identify Forex Trend Reversal

Beginners look to be the first to sell if they miss the breakout to the upside. Rookies look to buy if they lose money selling the breakout to the downside.

If you are considering buying dips and selling tops then be ready to get slaughtered.

When a market goes through accumulation or distribution phase. Retail traders place limit orders on either side hoping to be the first when it breaks out of the channel.

They place their stops on the opposite ends of the channel.

There is nothing wrong with this assumption. Unless you are willing to absorb the wide drawdown if the market goes nowhere.

How To Identify Trend Reversal In Forex

Your best bet is to wait for a break of support and resistance levels.

I thought a reversal is possible with the help of a chart pattern known as the double top. It didn’t work out well.

The market didn’t reverse. It went higher.

As of writing this post. The chart you see above happens yesterday.

What Made It Reverse?

Time. New York market opens.

Another example that contradicts the use of a double top chart pattern.

Price gets reverse and it is closing time for Sydney traders.

Did you notice something with the 2 image above?

Market change direction when a support broke. The problem is will it stay there.

I’ve come to realize this. Market makers are always trapping traders with volatility and high wicks. But nobody can stop you from entering again after getting stopped out.

If the reason for entering is still valid.

Do not walk away. Try again.

How To Identify The End Of A Forex Trend

When a market slows down as shown in the image below.

Do you think there are more buyers than sellers?

As of writing this post. I knew the market isn’t going to reverse anytime soon. So I sell on the spot.

I didn’t make much. I broke even on the way down.

The most reliable way to tell if the trend is near is the last push to the downside

As shown in the image above. You would have thought a break of resistance is a sign the downtrend has ended.

This is not obvious in the image below.

Price broke support but it went back up.

So what does this say about trend and reversal?

We know 2 things.

The first thing, an uptrend market consists of a pullback followed by a new high.

Second, a break of support in an uptrend market can only mean this. That buyers are taking profits and traders are selling. It doesn’t mean the trend has ended.

The same can is true for a downtrend market. It consists of a pullback followed by a new low.

A break above resistance can only mean this. That sellers are taking profits and buyers have stepped in to push the market up.

Forex Trend Is Your Friend

We have seen an uptrend market consist of a pullback followed by a new high. This pullback in a downtrend in a much lower time frame.

An example would be as shown below. First the hourly time frame.

Then the 5 min time frame.

So the saying about the trend is your friend is not right. It has flaws.

The trend is not your friend if you are not sure where it ends.

Conclusion

So far, I’ve covered the following :

  1. How to identify a trending market?
  2. Where will it go?
  3. When will it end?
  4. When will it reverse?

But I’ve not been able to pinpoint the exact levels where it will end or reverse. I will show you when.

You, the retail traders cannot move the market. You can only expect and react according. Your only edge lies in being selective when it comes to currency pairs.

Crosses and exotic pairs tend to trend pretty well. During times of accumulation or distribution. It can get pretty wide.

What Forex Pairs Trend The Best

The EUR or the Eurozone has a GDP of about $10.5 trillion. It is one of the largest economic entities in the world.

Do you know GBP or the British pound was once used as the world’s reserve before the Dollar took over?

The British pound is still well respected for its $1.7 trillion economic productions.

Aussie and kiwi came from a commodity status. Their biggest importer of energy, China, is their biggest client. AUD and NZD dependent on exporters of commodities.

They often trend very strong in relation to the demands of China’s GDP. That is why any news release from China has an impact on their growth.

Canadian or CAD is pretty much similar. Their recent interest in crude oil has seen a lot of changes in its trend.

Which Forex Pairs Trend The Most

These are the pairs I’ve seen that has trend pretty good ranges.

EURAUD

GBPAUD

GBPJPY

I’m leaving a few out like the GBPNZD, EURNZD or even the NZDJPY. So far Kiwi has been very stable.

Even though New Zealand derived its GDP from exporting commodities. It has stayed well away from mortgage woes that have plagued Australia and China.

What Is The Best Forex Trend Indicator

If you wish to benefit the monstrous number of pips that these pairs generate. You are better off trading the 4 hours or the daily chart.

I’m using a 10 EMA (exponential moving average) to track dips on an uptrend and peak in a downtrend.

What Is The Best Trending Forex Pair

Pound and Yen.

Which Is The Best Trend Reversal Indicator For Forex

A breakout to the upside when resistance level broke. A pullback appears. The pullback has to be weak so that buyers can take over.

The same is true for a downtrend.

A breakout to the downside followed by a weak pullback. Late sellers jump in and push price further down.

4 Keys To Profitable Forex Trend Trading

The first key factor you must understand is to identify the context of the market. The context I’m referring to is the trend.

#1 Trend Of The Market

There are 3 trends the Forex market has to offer. The uptrend, the downtrend, and the sideway trend.

Next. You need to ask yourself this 2 questions.

What is the market doing?

Where is it going?

I’ve mentioned Wyckoff market cycle consists of accumulation and markup. What follows next is distribution and markdown.

The first markup failed. The next obvious thing to do is to look distribution and the markdown.

The last candle show price rising. If a false breakout appears. We are looking for a break from support and markdown.

Now you understand how to find the context of the market. The second key factor you must remember is the power of risk to reward ratio.

#2 High Reward Low Risk

How much you can make as compared to how much you know you are losing. The keyword is “know”.

You can’t rely on the market for your profits. But you can control how much you spend.

A good example of a bad reward to risk ratio.

The above is a recent trade I made. I could have done better if I lower my risk through the use of multiple time frames.

A good example.

The 2 Holy Grail Of Trading

#3 Stop-loss

#4 small position

They made up the third and fourth key that could make you a profitable trader.

After a year of losing trade. I figured I could have avoided losing just by not having any stops. I tried all sort of ways to avoid taking losses. I refuse to cut my losses and blew up 2 accounts.

I employed Martingale loss recovery and blew up 1 major account and 2 mini accounts.

“If you can’t take a small loss, sooner or later you will take the mother of all losses.” – Ed Seykota

Finally, I force myself to set my exit before I place my profit target. Then as I plan my exit. I realize I don’t really have a good profit ratio.

This is when I become more selective in my setups.

One Final Thing

I learn this from Dr. Alexander Elder. He gives me 3 numbers to trade. The first number is 1%. This is the amount of risk you can lose per trade.

What that means is if your trading capital is about $10k. You are only allowed to risk $100 per trade. It could be 100 pips on a mini lot. It could also be 10 pips on a standard lot.

He also mentioned about the monthly overhead to run your trading business. It is around 6%.

Yes. That means if your drawdown is $600. You have to stop trading for the month.

The last number is profit revenue. Most hedge funds are losing money trading as compared to parking your savings at an index fund. It can be S&P500 or the DOW.

So if you can generate consistent income of 1% per month. You are already on par with Warren Buffett.

Wrapping Up

Consistency is the key here. All these trend detection strategies are time tested. The only thing I can’t promise you is overnight result.

Stick to them and you will eventually get familiar with identifying trend direction, find high reward low risk setups, increase your profits, and build a sustainable successful trading business.

One thing that I can’t stress enough is that quality setup is key when it comes to consistent profits.

Yes, I am an advocate of trading higher time frame. Heck, you can see it in my charts.

I rarely plan my setup on the 5 min chart. Although I do and that is only to improve my entry.

Quality is more important than quantity. If you mix the two you will dominate your game.

Did I leave out any Forex trend trading strategies that you have come across that worked well for you?

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