Stock Market Trend Reversals - Definition & Explanation

Trend reversal along the line

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    However, if a trader has begun to make entries in the direction against the underlying video binary options, he actually supposes that a reversal has taken place. In case a trader is going long during a downtrend, he supposes that the price will likely not go even one pip or tick lower.

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    Experts, however, would not approve such a statement, because the latter does not take into account some basic elements, proving the existence of a trend.

    Requirements for a reversal First, price movement needs to breach a key trend line from the previous trend.

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    This is a strict requirement. And second, which is often observed but not strictly required, following the key trend line breach, the price returns and tests the extreme level of the prior trend.

    A new trend has begun, if a series of higher highs and lows in an uptrend and lower highs and lows in a downtrend is already present.

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    The first move will breach the key trend line, produce a pullback, which tests the end of the prior trend and after this test traders will probably make entries against the prior trend respectively, in the direction of the new one. Sometimes this test may not exactly reach the old extreme. In other cases it may surpass it a bit.

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    Let us explain. If during a downtrend a sudden move to the upside occurs, which extends far beyond the bear trend line, the majority of traders will probably look for long entries on the first pullback in anticipation that this will be the first of many higher lows.

    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. Sometimes it respects Support or Resistancethe next time it could be trendline, and etc. This means a Support on the weekly timeframe is more significant than a Support on a 1-hour timeframe. So, if you see the market suddenly reverse, chances are, it came into a higher timeframe structure like Support or Resistance and reverse from it. Mean reversion — This means trading back towards its average value that could be defined using Moving AverageBollinger Bandsand etc.

    At times the pullback may extend below the low of the downtrend, thus, it may trigger protective stops on the new long positions. In this case, if the lower low reverses up within several bars, this may produce a considerable move to the upside.

    Can occur at any time. Short-term, short-lived reversal. Fundamentals i. Fundamentals DO change, which is usually the catalyst for the long-term reversal.

    Despite the fact that most traders prefer to buy the first higher low in a new uptrend and sell the first lower high in a new downtrend, if the trend demonstrates strength, there will be a number of pullbacks and higher highs and lows uptrend or lower highs and lows downtrend.

    Each of these pullbacks may be a good entry. The first higher low in the new uptrend can test the low of trend reversal along the line prior trend downtrendor test a breakout from a previous swing point, from a trend line, from a trading range or from an exponential moving average.

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    In the second case, the pullback may not approach too much the low of the prior trend downtrend.