Part 12 Technical Analysis – Confirming price action reversals

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Part 12: Technical Analysis – Confirming price action reversals

In the previous episode we’ve talked about how to confirm a reversal from the important support or resistance lines using basic or advanced indicators. In case you haven’t read it, I should probably introduce you to the basics.

What is a reversal

In the world of binary options and trading as such, we consider a breakout when the price stops at the given line (for example a trend line or support and resistance lines) and after a bit, the price continues to move in the other direction than before. It’s important to state that these lines are never an exact value (i.e.: 1.20322), but it’s always a value around let’s say 10 pips each way. We’ve talked about similar things in our Part 8: Technical analysis show.

The breakouts can be divided into three basic types:

  • The breakout with the trend
  • The breakout against the trend
  • And the breakout with the stagnation trend, recommended to be traded with short-term options

3 basic types of bounces

How to recognize and confirm a breakout

Realizing that the breakout could happen is really easy. All you need to do is to draw, in a right way, the important price lines and at the moment the price comes close to approx. 10 pips it could turn whenever, in this case the breakouts could happen. That’s why I was talking about an imaginary circle before.

To do so in the right way, I mean to find out whether the bounce was real is not an easy thing. That’s why we need to learn to recognize the false breakouts, so we don’t have unnecessary loses and the sooner we do, the better. We can recognize the breakouts by two basic methods – using indicators or price action and using both methods together is the best.

False breakouts could go in the same direction, it means that if we assume the downward direction of the bounce then the price will really turn and red candles will start to form. The problem though starts, when the trader enters a trade and the candle changes its mind, starts to increase and never goes back down.

Price action method

Using price action makes the confirmation of the bounces as easy as a pie.

  • Simple method using PIN BARs
    • If the price reaches the resistance line, we’ll wait until the next bar goes upwards, breaks the line and then starts to go back down. When a pin bar is formed and the next candle is bearish, we can talk about a confirmed reversal.

Simple pinbar preview

  • Easy method using so-called pullback (more on pullbacks in one of our future episodes)
    • The price breaks a given line (the figure shows a 61.8% Fibonacci line) and after couple of candles, comes back to the same line. Then, all you need is one candle going in the supposed turn and the confirmation is successful.

I think that these two methods should be enough for now, because these methods are the most used ones. I’m sure you’ll drop me a comment in the section below, if you have any questions. ��

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Author

More about the author Step

I’ve wanted to build a business of some kind and earn money since I was in middle school. I wasn’t very successful though until my senior year in highschool, when I finally started to think about doing online business. Nowadays I profitably trade binary options full-time and thus gladly share my experiences with you. More posts by this author

Part 11: Technical Analysis – Confirming reversal using indicators

Now that you’ve come all the way to the part 11 of our technical analysis series, I assume that you’ve studied all the previous ones. If not, I recommend you to have a look – it’s all very important and every intraday trader should know about them.

We’ve already talked about support, resistance, trend line and fibonacci lines. That’s already a whole bunch of tools that you could use for trading, isn’t it? However, what you don’t know yet is that you’re still missing the most important thing – how to know whether the price will bounce off the line instead of breaking through it? In Part 8: Technical analysis show – The breakouts, we have talked about the complete opposite and that is how to confirm that the price has broken out.

There are 3 basic types of reversals:

  • The reversal with the trend where you can go along with it
  • The reversal against the trend that is recommended only for the advanced traders
  • The reversal with the stagnating trend that could be used with the short-term options

3 basic types of reversals

How to recognize and confirm a reversal

To realize that the reversal could happen is really easy. All you need to do is to draw in a right way the important price lines and the moment the price will come close to approx. 10 pips it could go right back whenever, in this case the reversal could happen.

To do so in the right way, to find out whether the reversal was real and not only a false alarm is not an easy thing. That’s why we need to learn to recognize the false reversals, so we don’t have unnecessary losses and the sooner we do, the better. We can recognize the reversals by two basic methods – using indicators or price action and using both methods together is the best.

Indicators method

The bounces can be seen very nicely using oscillators, such as stochastic oscillator or DSS Bressert, but also indicators such as ADX or by simply showing Volume.

  • Simple method using STOCHASTIC
  • the oscivator breaks 80 or 20 lines inwards

A simple use of stochastic oscillator

  • Simple method using VOLUME IN THE GRAPH

– Volume is decreasing – > we could assume a real reversal

A simple use of volume

  • Simple use of ADX Indicators
    • If the main ADX curve is coming towards the line 50 we could soon await a reversal against the trend (it’s usually a short term reversal before continuing in the previous direction)

A simple use of ADX indicator

Price action method

You’ll find out how to confirm reversals using price action soon, in one of the following technical analysis series (Here: Part 12: Technical Analysis – Confirming price action reversals) Are you looking forward to it? Show it to your friends and share this article on Facebook!

Author

More about the author Step

I’ve wanted to build a business of some kind and earn money since I was in middle school. I wasn’t very successful though until my senior year in highschool, when I finally started to think about doing online business. Nowadays I profitably trade binary options full-time and thus gladly share my experiences with you. More posts by this author

4 Responses to “Part 11: Technical Analysis – Confirming reversal using indicators”

This is really helpful thanks but i have a question.How can you avoid fake reversals? i find myself putting or calling a trade that looks like its going to reverse and then it keeps rallying in its original direction.how can I avoid this?

Hi Tanaka, I recommend not to trade before the reversal happens. The price should go back for at least 10 pips before opening a trade in reverse direction.

I enjoyed the article so much. Wouldd you happen to mentor people?

Dear Mamidza, yes, if I have time, I gladly respond to any questions either in my mail or beneath every article �� Just ask away!

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