In this short video part of our series on simple trading techniques. We're going to
take a quick look at spotting trend reversals.
Hello I'm David Jones from Capital.com. This is the latest in our series of short videos looking at some
simple trading techniques, I'm really just looking at what the price sanction
is doing. We've talked about trading with trends in the past. Now of course trends
don't last forever. There comes a point where the market has been rising or
falling, falls out and starts going the other way; starts a new trend. So how can
we spot these trend reversals? It doesn't have to be rocket science and we can use
simple trend lines to do this. So rather than talking about it, I think the
easiest way is to show you on the chart. So let's take a look at a couple of
example markets. Here's the pound US dollar daily chart, which the market slid
heavily from May 2018 through to August. We had this downtrend in place - I did
actually use this as an example in one of our other trading strategy videos,
when I was talking about trading with the trend and every rally up to this
downtrend we saw the market run out of steam. So the assumption is that trends
are going to continue but of course there comes a point when things change.
Let's just walk this forwards, so we can see here, the middle of September 2018
things do change and we see the pound- U.S. dollar finally breaking out of that
downtrend, so it's at this point we can start thinking about a trend in the
opposite direction. Okay so if we take it off the lows looking at that, so now
because the trend line has broken, we're going to switch our approach from selling
into strength, to looking to buy into the dips because now the market is in an
uptrend, so any sell ups - like there's a major sell-off here, in the third week of
September, we're going to use as a buying opportunity and we're using our rising
trend line here as support. But this move here, this is our trend reversal.
Let's look at an example of an uptrend changing into a downtrend.
This is an hourly chart of the German stock market index, the DAX, during August 2018 so
each bar, each candle, represents an hour's worth of trading.
We've got a very gradual uptrend - we do have high lows, just about higher highs
and this uptrend has been going for about a week in this example. So we're
expecting any weakness back to here is a buying opportunity but what we're
talking about courses trend reversals, so let's just walk forwards.
So we have a really sharp move over a couple of hours, where it goes crashing through that
uptrend. So it's at this point we have to start thinking "well that trend isn't in
place anymore", so that's when we switch our approach from buying dips to looking
to sell into strength, assuming a new trend downwards is starting. This did end
up being an extreme example, the market did fall very heavily, but it shows how
you have to be aware of these moves when they happen, but you don't need to have
lots and lots of different indicators on your chart to identify trends and spot
opportunities when those trends might be changing. It's important to point out
these reversals don't work all the time - no nothing works all the time. There is
no hundred percent no losing trading strategy when it comes to financial
markets but it as you saw that Pound-U.S. dollar example and also the DAX
example, which was an extreme one, you know if we see these levels break - the
trend line break - it can give us a clue and a major indication that maybe
sentiment is starting to shift. We need to adjust our approach and start trading
maybe the other way, of course using sensible risk management such as stop
losses. We'll start wrapping things up there, as usual don't forget there's a
whole load of content on our YouTube channel. We look at individual markets
during the week so: currencies, indices, cryptocurrencies and look at trading
strategies and technical analysis like this. To never miss out just make sure
you're subscribed, by clicking on the subscribe button and if you click the
alarm bell notification, you get notified every time we upload a new video but for
this short introduction to spotting trend reversals we'll leave it there so
from me, David Jones, and Capital.com good luck with your trading.