How to trade reversals in Forex?

When you are a technical trader, you should specialize in trading only one system until you can trade that Autor - Harry Davis strategy comfortably and consistently profitably. A trader who focuses exclusively on one system quickly understands all the subtle nuances and can then easily become an expert on a trading model.

A few years ago I decided that in my own trading I would only trade continuations and reversals. What I didn't know at the time was that this decision would allow me to quickly "elevate" my trading to a whole new level. And today I wouldn't be able to generally interpret charts or use fundamental data, but when it comes to trading reversals, I still meet traders who understand market transitions better.

In this article, I want to highlight 5 important reversal trading concepts that can help you avoid common trading mistakes.

#1 Just one support/resistance level is not enough to buy or sell

This is the first and most "expensive" mistake that traders make. Never blindly buy from a support level and sell from a resistance level.

I remember that in the middle of May, many people were watching the 1.1215 level in EUR/USD and many traders contacted me saying that they were buying at the level when the price approached it, in the hope of a reversal; the key word here is HOPE.If you want to trade reversals by blindly buying support or selling resistance, this is the worst thing you can do and shows that you are trying to predict market reversals. It's like jumping in front of a moving train, hoping it will suddenly stop - but usually you'll just be crushed. The next 4 points will help you move away from prediction trading.

#2 Your insurance - skip the first and last part of the price movement

In order to get away from thinking about predictions, you have to feel comfortable with missing price action. It may sound strange, but it will make a huge difference in your trading.

So instead of buying as soon as the price hits a support level, one should wait for confirmation that the price is actually finding sellers and is actually going up. Look at the screenshot below, which shows a long USD/CAD position. I opened a long position after the price had already risen and closed my long position before the price topped out.

I call this principle my insurance, and it will help you stay away from the types of trades to which this expression is applicable - "catching a falling knife", and also, you should not try to stay in trades for too long in order to "give away" profits after market. Newbie traders shy away from this because they think they can get into good trades early instead of waiting for confirmation that they can lose a certain amount of profit.Correct entry after determining the right direction

#3 Strong Demand vs. Weak Demand

The EUR/GBP pair was another classic example of many traders interpreting and using false price history. Let's go through points (1) and (2) separately and see how price history could help us make more informed decisions.

Point 1 - Why Support Failed: A lot of traders looked at 0.773 in EUR/GBP and many wrote to me that they bought there (again without waiting for confirmation). Obviously, you can see that the level has failed, and if you continue to blindly trade such levels with pending orders, you will simply get stops.

At the same time, when we look to the left, we can see that the price was at this level last time and stayed there for quite some time. Regular technical analysis tells you this is a strong level, but common sense tells you it's not. Just think about what the price action tells you: if the price manages to stay at the price level for a sufficiently long period of time, it shows that there is a balance between sellers and buyers. However, for a strong price movement, a large imbalance needs to occur.

Point 2 - Price spikes based on imbalance: As we go to point 2 (on the right), we can see that a large number of buyers join and the price stops the downward trend.