Those who have been trading for a long period, always suggest that new trader’s trade with the trend. They often say trend trading is the only way to make a profit. Based on this theory many new traders in Australia start to trade the market. But soon after starting to trade the market, they lose their entire investment. They start to blame the market and quit trading.
Do you think they have traded the market with the trend? Due to their lack of knowledge, they failed to identify the key difference between retracement and reversal. Most of the time, they trade the retracement and lost money in trading. Today, we will be learning some useful techniques which will help up identify the retracement and reversal in trading.
What is a retracement?
A retracement is a small price movement against the major trend. The price of a certain asset doesn’t go in the same direction without correction. The corrective phase of the price is known as a retracement and is usually represented by a smaller market movement against the major trend. If you can find the key retracement, you can easily make a decent profit from this market. If possible, use the price action signals.
What is a reversal?
A reversal is defined as a trend change. If the price of a certain asset breaks a major trend line or starts exhibiting extended movement against the past trend, you can consider it as a sign of reversal. But having this information is not enough. We need to know some techniques by which you can spot the major retracement and reversal in any asset. Trading the major reversal is not that hard. Try to use simple logic and trade the market with low-risk exposure.
Fibonacci retracement tools
Those who have access to a robust trading platform can use the Fibonacci retracement tools to find the retracement zone. For that, you need to have precise knowledge about the key swings. To find the bullish retracement level, you have to use the most recent swing low and high. The price might test the 38.2%, 50% or 61.8% retracement zone and as long as these levels hold the price we can assume the price movement is part of market retracement. But if for any reason the price manages to break the 61.8% retracement zone, you can consider it a reversal sign.
Use of the chart pattern
To find a major reversal in the market, you can use the chart pattern trading technique. For instance, by using the head and shoulder chart pattern you can spot the bearish reversal sign in any asset. The triangle chart pattern is also used by many professionals. But to learn the chart pattern trading technique, you must use the demo account. Open a demo account with Saxo and see how the market behaves after breaching the major chart pattern. Once you understand the price movement, you can easily spot the major reversal based on the chart pattern trading strategy.
Economic factors in the global market
Those who have extensive skills in the trading profession knows the perfect way to analyze the news data. Based on news analysis, you can spot the major reversal. After the release of minor news, the market movement is considered as a retracement. But if the market moves against the major trend after high impact news, you can consider it a reversal signal.
Make sure you are well aware of the high impact news or else you never know when the market will change its trend. Things are not all difficult provided that you know the perfect way to assess the important parameters. Never try to trade the market or analyze market movement based on technical data. Try to incorporate major news data with the technical parameters and you will get a better picture of this market. Start thinking smart and you will eventually become a profitable trader.