We will have a look here for different ways to detect a trend reversal. For a better understanding we are categories these into 3 ways.
Let us have a look on these one by one.
- SWING PIVOTS: Price moves in waves. The start and end points of these waves are swing pivots. Once you’ve marked swing pivots, higher highs mean a bullish trend. Lower lows mean a bearish trend.
- TREND LINES: You can draw trend lines by connecting swing pivots. A trend line defines and tracks a trend. The basic signal of a trend reversal is when price breaks a trend line.
- PRICE CHANNELS: A price channel is formed by extending a parallel line from a trend line. Price bounces between these lines. Overshoots of the channel line warns a reversal. Use trend line break as confirmation.
- MOVING AVERAGES: We can find reversals with an intermediate to long-term moving average by observing its direction. For long term use 50-period moving average. For short term use 20-period moving average.
- DONCHIAN CHANNEL: The Donchian Channel has two lines – highest price & lowest price attained within the lookback period. A trend reversal signals when prices made its high/low above/below the channel.
- MACD: It is the best tool to identify a reversal in advance. These reversal signals came in the form of Divergence. A price divergence is a powerful reversal signal. It occurs when price and an oscillator disagree.
- ON BALANCE VOLUME (OBV): This volume based indicator does not require a value. However the indicator line is not very smooth. The best ways to use this is to ignore its value and focus on direction only. When both price and indicator move in same direction then the trend remains intact. A mismatch in price and indicator direction signals a trend reversal.
- VOLUME: In an ongoing trend when volume starts declining then this should be treated as a first warning for a trend reversal.
- PRICE – VOLUME DIVERGENCE: A price in a rising trend should be met with rising volume. If we see lengthy divergences lower volume with higher price or higher volume with lower price, then this could be a sign of distribution and a reversal may be on its way.