How to identify a trend reversal using market structure
There are multiple ways to identify a trend reversal.
You can look at the price and see if it was going up and is now going down and BOOM congratulations! You just spotted a reversal.
However, I always like to analyse the market a little bit more and try to quantify what I see. This helps me to trade unemotionally and make fewer mistakes in analysing the markets. So how do we do this? Let's get into it.
Determine the important price points at the initial trend. Which are in this example (bearish trend) the lower highs and the lower lows the downtrend trend keeps forming. Always look for the lower lows/highs and higher lows/highs in a trend.
As long as a downtrend keeps making lower lows and lower highs, the downtrend is continuing. As always, the price starts consolidating eventually which means that no new set of lower lows and lower highs are made.
When the price breaks the level of the last lower high (to the upside). We have a potential break of the market structure (BOS). Which indicates to us the potential trend reversal.
When after this BOS a higher low is formed and after the higher low is a new higher high formed then you just spotted a successful BOS and trend reversal.
All these higher and lower lows and highs may sound confusing. The best way to learn is by practise and not by reading. So please practise this on your favourite pairs and you will notice that it gives you more confidence in the market but also a clear vision of the structure of the pair or market you are analysing.
This is not a trading strategy to find good entries but more something you can always use alongside your strategy to give you a clear vision of the market you are trading.
Let me know what you think!
You can look at the price and see if it was going up and is now going down and BOOM congratulations! You just spotted a reversal.
However, I always like to analyse the market a little bit more and try to quantify what I see. This helps me to trade unemotionally and make fewer mistakes in analysing the markets. So how do we do this? Let's get into it.
Determine the important price points at the initial trend. Which are in this example (bearish trend) the lower highs and the lower lows the downtrend trend keeps forming. Always look for the lower lows/highs and higher lows/highs in a trend.
As long as a downtrend keeps making lower lows and lower highs, the downtrend is continuing. As always, the price starts consolidating eventually which means that no new set of lower lows and lower highs are made.
When the price breaks the level of the last lower high (to the upside). We have a potential break of the market structure (BOS). Which indicates to us the potential trend reversal.
When after this BOS a higher low is formed and after the higher low is a new higher high formed then you just spotted a successful BOS and trend reversal.
All these higher and lower lows and highs may sound confusing. The best way to learn is by practise and not by reading. So please practise this on your favourite pairs and you will notice that it gives you more confidence in the market but also a clear vision of the structure of the pair or market you are analysing.
This is not a trading strategy to find good entries but more something you can always use alongside your strategy to give you a clear vision of the market you are trading.
Let me know what you think!