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    Spotting and Trading Reversals in Forex

    When the price line of a currency pair starts moving in the opposite direction, it’s easy to jump in and either buy or sell to make the most of that movement. But is the price just going to be moving in that direction temporarily – and are you risking your pips? Here’s how you can begin to spot and trade true reversals when trading Forex.

     
    Identifying retracements and reversals
    The first step to successfully trading reversals is to be able to tell when a price movement is either a retracement (a temporary reversal) or a proper reversal in the prevailing trend. 
     

    • A retracement will often happen after a significant price movement. There are a few signs to look out for to determine if this is a brief trend. If the price is trending downwards then there will be interest in selling, and if it’s trending upwards there will be interest in buying, as traders will typically be expecting this trend to continue. If you’re using Fibonacci Retracement levels, you may well see the retracement begin to shift at 50% or 61.8% of the full range.
    • A reversal often occurs following a change in fundamentals, such as an economic release. One sign of a possible reversal is that there isn’t much interest in buying in an uptrend or selling in a downtrend, which means the movement is less likely to reverse. If using Fibonacci Extension levels, you might expect the reversal to occur at around 161.8% of the full range. The price may also break through either the lower support points or the higher resistance points if you're using pivot points, and also through the trend line.

     
    How to trade reversals in Forex

    It’s often important to protect yourself a little during reversal trading as the uncertainty is somewhat high. It’s typically a good idea to have stop losses in place to minimise your risk in case the reversal doesn’t actually eventuate.

     

    Many traders try to trade at or near the breakout point and exit at the end of the volatility. Traders will have different ways to identify a slowing in momentum at the other end of the trade, and one sign of this can be shorter candlesticks with longer wicks. Other traders will search for a currency pair with relatively low volatility and anticipate a spike in momentum. Of course, if you do miss the reversal there is almost always a retracement soon after which can be taken advantage of too!

    Risk Warning: Investing in Margin FX products carries a high degree of risk and is not suitable for all investors.