How To Identify Trend Reversals (The Essential Guide)

How to identify trend reversal — identify weakness in the trending move

First, let me define what a trending move is…

A trending move is the “stronger” leg of a trend and it trades in the same direction of it (that’s why I call it trending move).

The trending move (in a healthy uptrend) usually has more bullish than bearish candles; the bullish candles are relatively larger than the bearish ones, and the bullish candles closing near the highs

However:

When the bullish candles are getting smaller, it’s telling you the buying pressure is getting weak, or there is equal selling pressure coming in.

Now, this doesn’t guarantee the market will collapse lower. But it’s a tell-tale sign the buyers are getting weak and may need a “pause” before staging another move higher.

Next, you’ll learn about the retracement move…

Identify strength in the retracement move

A retracement move is the opposite of the trending move. It’s the “weaker” leg of a trend and it trades against the direction of it (that’s why I call it retracement move).

The retracement move (in a healthy uptrend) usually has more bearish than bullish candles; the bearish candles are relatively small, and it usually closes near the middle or lows of the range.

However:

When the bearish candles are getting larger, it’s telling you the selling pressure is getting stronger as the buyers are unwilling to buy at higher prices.

Again, this doesn’t guarantee the market will reverse from here. But it’s another sign the buyers are getting weak.

How to identify trend reversal — a break of Support/ Resistance area

As a trend matures, it will move into a distribution stage where both buyers and sellers are in equilibrium (thus looking like a range market).

At this point, it’s clear the area of Support is an important level as it’s the last line of defense for the buyers. If it breaks, it’s pretty much game over for the bulls.

Here’s what I mean:

Based on my experience, the more times Support is tested within a short period of time, the greater likelihood it’ll break.