What's Trend Reversal in Indices Trading?
Definition and Meaning of a Trend Reversal & How to Trade a Trend Reversal
In trading the trend line break signal is used to signify a stock market reversal signal. When a trend line is broken then it means that the momentum of the current trend is reducing and current trend might reverse and start moving in the opposite direction or form a consolidation stock chart pattern before it reverses.
Market Reversal Signal
After stocks trading price has moved in a specific direction for an extended period of time within a trend it reaches a point where it stops moving within the market trend. When this happens we say the trendline has been broken.
Since the trend line is the point of support or resistance then we expect the stock trading market to go toward the opposite market trend direction. When this happens traders will close the open trade which they had bought or sold. This is known as taking profit.
Up Indices trend Stock Reversal
When stock trading price breaks-out upward trendline (support) trading market will then move down or form a consolidation pattern before moving downwards.
What is Upward Trend Reversal in Indices Trading? - What is a Upward Trend Reversal?
This upward trend line break reversal stock signal is considered to be complete with the reversal pattern of lower high is formed on the stock trading price chart. This also provides a trading opportunity to go short once the trend line broken.
Down Indices trend Stock Reversal
When stock trading price breaks downwards trendline (resistance) the stock trading market will then move upward or form a consolidation pattern before heading upward.
What is Downwards Trend Reversal in Indices Trading? - What is a downward Trend Reversal?
This downward trend line break reversal stock signal is considered to be complete with the pattern of a higher low is formed. This also provides a trading opportunity to buy long once the downward trend line is broken.
NB: Sometimes when stock trading price breaks its trend it might first of all consolidate before moving in the opposite direction. Either way it's always good to take profit when the stock market trend direction reverses.
To trade this trend reversal setup as a trader once you open a new trade in direction of the trend reversal the stock price should immediately move in that market direction, in a trading price break out manner. This means that the stock trading market should soon move in that direction without much of a resistance.
If on the other hand the stock trading market does not immediately move in direction of the stock trading price breakout then it is best to close out the trade because it means that the current trend is still holding.
Another tip is to wait for the trendline to be broken and for the stock trading market to close above or below the trendline so as to confirm this trend reversal.
What happens is that most traders place trades waiting for reversal stock signal even before the current trend is broken, only for the stock trading price to touch this trendline & for the current market trend direction to hold & indices to continue with the current market direction.
Hence, when trading this trend reversal setup it's best to wait until the stock trading price break out has been confirmed by trading price closing above or below trend line, depending on direction of the market.
- Upward Market Direction Reversal -trendline reversal stock signal is confirmed once the stock trading market closes below this upward trend line, this should be the correct time to open a sell trade, so as to avoid a trade whipsaw fakeout.
- Downward Market Direction Reversal -trendline reversal stock signal is confirmed once the stock trading market closes above the downwards trendline, this should be the correct time to open a buy trade, so as to avoid a trade fake out.
