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Be Careful With the Reversal Trade Setups

You read everywhere that trend is your friend and you should not go against it. This is so true. However, any trend will end finally. It either reverses or goes sideways. As the markets trend only 30% of the time, it is good to take the advantage of the reversal setups and also the ranging and sideways markets.

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Sometimes trends are continued for such a long time, specially on the currency market. If so, you can ride the trend and take the continuation trade setups. But sometimes the reversal setups are so profitable as well.

The point is that the reversal setups are usually riskier to take because it is risky to go against the strong trends. However, you can filter out the false reversal setups by following some simple rules.

The first rule is that you should not take the the reversal setups when the trend is still strong and there is a fresh movement right before the reversal setup forms.

There is no doubt that a strong movement cannot be continued forever and the party that has taken the control will get exhausted and wants to stop somewhere. It means a portion of them want to close their positions to collect their profit, and the others stop adding to their positions. So the movement becomes weak after a while and then stops, and the market will go sideways.

While the movement is still strong, some reversal setups form. Those are the ones that you should avoid, because most probably the movement will be continued after such reversal setups. Here is some good examples.

At the left side of the below chart, you see s strong and continued uptrend. While the price is going up continuously, some reversal setups form. Those are the ones the you have to avoid, because they form right after a strong up movement.

As the left side of the chart, you see a too strong down movement. But even in case of such a strong down movement, some reversal setups form. Those are the ones that you have to avoid strictly because they are too risk to take.

The red arrows show the reversal trade setups that you have to avoid and the green arrows show the strong movements that had been formed right before the reversal setups. Indeed, the green arrows are the reasons of avoiding the setups that the red arrows have marked:

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Reversal Trade Setups that Have to Be Avoided.

The second rule is that you should take the reversal setups only when you are sure that the trend is completely exhausted and ended.

Although still there is no guarantee that the trend not to be continued, at least you will have the chance of moving your stop loss to breakeven or getting out before it becomes too late because the market will follow the reversal setup for a while before it continues the trend.

The reversal short trade setup that was formed by 2014.05.08 daily candlestick on EUR/USD daily chart, is a good example. It is formed where the bullish market has become completely exhausted and almost sideways (see the below chart.)

The green arrows show that bulls became exhausted and weaker as the time goes by. While the market becomes almost sideways (the yellow zone), a strong Bearish Engulfing forms by 2014.05.08 daily candlestick and then a support breakout forms that I call it “reliable” support breakout in this case because it is formed at the right place right time:

Strong Reversal Setup Formed at Right Place Right Time

The rule number three is that the reversal setup has to be too strong, otherwise you have to avoid it.

You can see this on the above example. The reversal trade setup that was formed by 2014.05.08 candlestick is really strong. That is why the market formed a strong downtrend after that.

There is no doubt that traders cannot take all the movements and ups and downs. They are either late or hesitant in some cases. But being late or hesitant is better than taking the wrong setups.

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To be at the safe side, you can wait for the markets to trend, and then you take the continuation setups, in case you think the reversal setups are too risky to take.

Good luck 🙂

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20 thoughts on “Be Careful With the Reversal Trade Setups
  1. James NM James NM says:

    A great teacher you are Chris, always there for us not to be distracted by events and you remind us of what to do and don’t. you will remain special in our lives live long

  2. Ben Aqiba Ben Aqiba says:

    Hello Chris,

    great article. I enjoyed reading it.

    I remember your sentence “The trend will not reverse so easily “. And this is so true.

    I learned from your articles that the setups are much stronger when one setup confirmed a previous one, when we have double top. In both examples above, the price is failed to break above previous high.

    “Formed on the right place in the right time”- this sentence is so deep,and so important ,because in her is contained the essence of strategy.

    Thank you

  3. Dhanan R Dhanan R says:

    Thank you Chris – your article came on the right strategy at the right time.

    The reversal setup using Bollinger Bands is one of the most profitable, and you absolutely nailed it – by following your 3-rule advice and practicing it, I’m sure we can become better traders.

    And now is the right time – we can make a clean new start in the year 2017. Wish you and Luckscout team a very happy and prosperous new year!

    • LuckScout LuckScout says:

      Thank you so much Dhanan.

      I wish you a very happy new year as well 🙂

      There are a lot of great things that we will do with the help of each other the next year and the years after.

  4. Amog Mayor Amog Mayor says:

    What manner of man are you mentor? That God endowed you with great wisdom and knowledge in every area of life! You have really impacted your generation positively and generously. As you always there for us, so also will the Heaven be always there for you. Thanks and God bless you Chris.

  5. N A N A says:

    Everything get a reasonable sense!
    Just PERFECT!!

    Thank you Chriss

  6. thanks chris i like this article.

  7. A great teacher you are Chris, every Article is very good teaching GOD bless you and Advanced Happy new year thanks

  8. Hey chris if broker used 1:100 leverage max and margin call 100% and margin stop out 120% is this considered a good broker.? what do you think.? i still demo but already researching a good broker to find if i ready to go live. and i just want to open with 1000$ if i go live. 0.1 lot min is too much for me

  9. Reza Samimi Reza Samimi says:

    Thank you Chris and Happy New Year 🙂

  10. Chris.. happy new year..

    I have been study forex charts for 2 years. Visited so many forex wedsites and recently found your website. Wow! The best and 100% correct infromation in the whole enternet websites.

    I have read some of your articles and keep reading, all what I learned from my study to charts found it in your articles and even learned new things. Your knowledge about forex is amazing!

    Till now I used and only believed in channel resistance, support and resistance. No indicator used.. but now after visiting your website I combined bollinger bands in three sets (deviations 1, 2, 3) and stochastic. Currently I’m testing this trading system.

    My way:
    -using real Micro account in bank forex broker. jforex platform works on java ( I have understood that it is better than mt4. It is really fast in hitting targets). I like more mt4 platform. I have also demo account in another broker mt4.. because I was afraid that my borker chart not so real or they can change the chart so I analyses the charts on the demo account with mt4 (broker A) and trade in my real micro account.
    (Broker B)
    Again: your information in the articles are so true and real.. not like other websites
    well done! You are the best!

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