A trend reversal recognition strategy

Indicators can be extremely useful for traders in making exit / entry decisions or holding positions. And while traders are following the main market trend through EMA / MA (price averages) and price action signals and they are preferred by the majority, those who are betting against the trend are looking for a different approach to their trades. This approach is known as “turning to the environment,” or returning the price to average levels of market perception, and often marks a change in direction of movement.

We will look at two major strategies used to identify such market movements.

RSI oversold / overbought levels

When traders refer to over-sales or over-purchases, they often refer to what the performance of an oscillator is against the chart. Oscillators tell us whether an asset continues to close near the top of the multi-period range or near the bottom of its multi-period range.

One of the most popular oscillators is the RSI (Relative Strength Index), created by Wales Wilder. According to Mr. Wilder, we can only trade with RSI and be profitable, but this is too individual. The oscillator constituting the RSI has a range between 0 and 100. Levels between 70 and 100 are considered as overbought levels, while levels between 30 and 0 are considered as overbought levels.

According to Walder’s theory of trading with RSI – when a clear trend appears on the market and the short-term chart oscillator is in the level of overbought or overbought, then profits from trades in the direction against the trend would be more likely. In other words, when we have a downtrend, we enter into a trade against the trend (long) when the oscillator is between 0-30, and when we have an upward trend – we enter into a trade against the trend (short) when the oscillator is at levels 70-100 .

Bearish and Bullish divergence

Divergence occurs when price and momentum are out of sync. There are traders who trade purely and solely by momentum, observing whether the price is moving higher with a weaker momentum or vice versa – the price is moving lower with a weaker descending momentum.

There are various indicators of momentum tracking, the most commonly used are CCI, RSI and MACD.

In many cases, in the presence of bearish divergence – higher price values ​​and lower oscillator values, the price of an asset reverses its direction – in the case of ascending to descending. In bullish divergence, the opposite is observed – in a downward movement with lower price values ​​and higher values ​​of the oscillator, we can expect upward movement – against the trend.