Acquaintance with the best ways to find a trend reversal

Johannes Röll 01 / March / 20 Visitors: 406 ★★★★

It is immediately worth noting that I only trade cryptocurrencies and can share my experience based on the behavior of the price of digital assets. Although there is an assumption that the psychology of the crowd works the same everywhere and it does not matter which tool to trade.

1. Breakdown of the trend line

To begin with, let's look at the origins of technical analysis. The first signal about a reversal is a breakdown of the trend line.

But this is not a clear sign of a reversal, but only a signal that it is time to take a closer look at this instrument. The fact is that large players (who can act as owners of cryptocurrency exchanges, market makers, and so on) know the accumulation of a large number of stop-losses. The stops for all the classic books of technical analysis are usually set immediately for a strong level or trend line, respectively, for the gain of liquidity, a large player can put the price in stops, redeem an extra offer and go further in the original direction.

Therefore, a breakdown of the trend line is not considered a signal, but only makes you pay attention to this section of the chart.

2. Price does not update previous high

Here you can attribute all the possible patterns that predict the reversal:

GiP (Head and Shoulders);

Double bottom;

Triple bottom;

and so on.

This signal, coupled with the breakdown of the trend line, is considered to be stronger, since it indicates the weakness of buyers. The fact is that in case of a false breakdown of the trend line, it does not make sense for a large player to hold the price for a long time below the level, respectively, he redeems all stop-losses and immediately pushes quotes in the original trend direction.

Although there are situations when the price specifically hangs below the level. The goal is the same - to add liquidity. The fact is that the crowd, seeing a delay in the price, suggests that there is a set of positions for further movement towards the breakdown, respectively, it begins to open short positions. A major player buys these short positions and moves the price in the initial movement. This creates a situation where a major player earns, and the crowd sits in the cons. Along with the price movement, the crowd has to close its short positions, which pushes the price even higher.

Therefore, the breakdown of the trend line and the lack of updating of the previous high is a strong signal, but not 100%.

3. Pulse five-wave motion

The fact is that according to Elliott, if the price develops a three-wave formation, then the movement is corrective, and if the five-wave one is trending.

Therefore, when a trend reverses, you should pay attention to price behavior. If the formation is five-wave, then it will be followed by another movement in the same direction after correction. Therefore, even if this is not a reversal of some more global trend, then the chance to suffer losses is still extremely small.

Also, this signal can be combined with the previous two, for example, the price breaks the trend line, does not update the maximum and at the same time draws a five-wave impulse movement. But here it is worth paying attention to what wave formation was before this five-wave impulse. Waves generally do not use trend lines and other patterns.

Johannes Röll

Johannes Röll was born 1978 in Brilon,Germany. Graduated RWTH Aachen University. Over the past ten years he worked as Head of the plastic card team, where he was mainly responsible for the development of the distribution, Head of sales Department and Financial Analyst,where he got experience in planning and support sales figures for branches. For the present he works as freelancer