Candlestick Trading Blog
April 9, 2010
Market Reversal
| There are a number of technical indicators that can help you predict a market reversal either large or small. Understanding patterns on technical analysis charts is the first step in anticipating a market reversal and being ready to trade at the right moment. It makes no difference if you are going to be buying stocks, shorting stocks, buying puts, selling puts, buying calls, selling calls, or trading futures. Anticipation of market reversal can be profitable for traders who recognize evolving and established chart formations. It is also wise for the trader to have a sufficient grasp of the fundamental analysis necessary to be trading the commodity, stock, option, or future contract involved and to be current on pertinent market news. Trading a market reversal starts with understanding the markets for your stocks, commodities, options trading targets, or Forex currency pairs. When a trend begins in any equity market it will establish, last, and then breakdown to reverse or continue again. When the trend is established, look for support and resistance zones as the first places to trade market reversal. When an equity is reliably trading in a channel it will be possible to buy and the bottom of the cycle and short sell at the top, making a profit so long as the channel lasts. When a channel gradually closes off on technical analysis charts it represents a triangle pattern. In this situation you can still trade the ups and downs as the price fluctuates but the profits will diminish as the market reaches a consensus on the equity or derivative. A typical end result of the triangle pattern is a market reversal of the last cycle and continuation in a new trend. Patterns that are considered good indicators of substantial market reversal are the “M,” “W,” and head and shoulders charting patterns. For example, a stock or commodity is falling due to bad news, dire economic circumstances, and a new competitor taking market share or other reasons. The price will reach a resistance level and rebound only to head back down again. It reverses again heading back up which is a “W.” Sometimes when the end of the “W” is heading up it will reverse and reverse again one more time which is a reverse head and shoulders pattern. These work in reverse to as an “M” or head and shoulders pattern. In each case these patterns demonstrate that an equity has reached a strong and fundamental resistance level and will rebound. You can use Candlestick charting and make your predictions with Candlestick pattern formations or use online trading software that works on the same principles. In either case you will let the market tell you what it will likely do next. However, it is important to have basic knowledge of the market and underlying equity involved in each trade. New developments that have not hit the news can affect the market and disrupt the patterns displayed by technical analysis tools leading to unsuccessful trades. Also, it is wise to know the fundamental limits of the equities you trade. Sometimes trading can take on a life of its own that becomes distant from the ability of the underlying equities to support higher and higher prices. This is where we see stock market crashes. A basic knowledge of what level trading should be on the charts may just help you be on the right side of a trade just as the next dot com bubble bursts. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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