A reversal in trading actually represents the price direction of an asset. It can happen in both upside or downside. If it follows an uptrend, then it goes downside. On the other hand, if it follows a downtrend, then it goes upside.
Reversal usually formed based on the asset’s overall price direction, not based on one or two bars within your charts. Traders can spot reversal with the help of several indicators, including the use of trendlines or moving average.
What Can Traders Know from a Reversal?
Reversals usually happen in intraday trading. They happen quickly, yet sometimes they can happen over the years, weeks, or days. Besides, they can also happen in a different time frame.
The impact of reversals can be different from different types of traders. For instance, an intraday reversal within a five minutes chart will not bring anything for long term investors. They will rather focus on daily or weekly reversal. Contrarily, for day trader, that five-minute reversal will be essential.
During an uptrend, a series of higher swing highs and lows, there will be a downtrend reversal. What happens when they change into lower highs and lows.
Meanwhile, during the downtrend, a series of lower highs and lows, the reversal will transform it into higher highs and lows.
Traders can find reversal based on price action, alone. Or else, they can also use indicators to find them.
The Difference between Reversals and Pullbacks
As defines above, reversal is a trend change of a certain asset price. On the other hand, a pullback is a counter move in a trend. Thus, a pullback does not have the ability to reverse the trend.
During an uptrend, traders will find higher swing highs and lows, while the pullbacks create higher lows. So, an uptrend reversal will not happen until the price creates a lower low within the same time frame used by traders.
Usually, reversal starts with potential pullbacks.
