How to Spot a Reversal Trade

How to Spot a Reversal Trade

Reversals occur quite often, but if you do not know what to look for, you cannot trade them.
Reversals are one of the strongest price action setups, and one of the easiest to trade. And because they occur so often, you can trade this setup exclusively and be a profitable trader.
In fact, for years Forex trading strategy focussed on reversals only. However, these days I trade more price action setups.
Reversal trades come in three parts:

1. The preceding trend.
2. The Indecision candle(s).
3. The reversal trend.

Let’s break down each of these parts.

The Preceding Trend

A preceding trend is a strong move by the bears/bulls heading into an area of support/resistance.

In the example above, the preceding trend is a very strong bearish move, indicating that there are a lot of bears in the market and very few bulls. If bulls were strong then price would not be trending down.
The preceding trend shows us that bears (sellers) have strong control of price and they are pushing price down into a support area.
The opposite applies for a bullish preceding trend which would show bulls (buyers) trending towards resistance, as you see below.

A preceding trend can be formed by as little as one candle. If the candle is strong and covers a lot of price distance, I categorise it as a preceding trend for the purposes of reversal trading.
The example below shows a single candle preceding tend.

Preceding trends are pretty simple. As long as you see a strong move heading into an area of support or resistance, you can consider it a preceding trend.