Forex Trading Strategy to Trade in Reversals
Forex Trading Strategy built on reversal trading. It has now expanded beyond just reversals, but the reversal trading strategy is where it all begins. Below we explain the reversal trade entries into a simple step-by-step process.
Getting in at the Right Time
The Reversal comes in three parts:
- The Preceding Trend
- The Indecision Candle
- The Reversal Trend
You need to enter in the reversal trade after the part two closes, but before the part three completely takes off. Certainly, if you enter after the reversal trend takes off, it is too late.
Also, you need to make sure you do not enter too early as you could be entering a false setup.
In the below image you see a proceeding the trend heading into support, indecision, and a failed reversal trend. If you entered too early, you would have failed the trade.
Failed traders happen, there is nothing you can do about it.
But getting into right time lowers the percentage of failed trades.
Many people wait for a candle close to getting in, but as per the result tested this thoroughly and waiting for the closes get you in too late. In the below image you can see the first candle in the reversal trend closing far from support.
That means you miss out on a lot of the potential profit, which is apparently not good.
The key to reversal trading or any trading for that matter is getting in at the right time.
How to Enter Reversal Trade
Below I have explained three best entry trading strategies: entering into the new high/low, retrace entries, and distance entries.
When indecision forms on an area of support or resistance, you can use this high or low of the indecision candle as an entry trigger and as a stop loss.
In the above image, indecision has formed on resistance after a previous bullish trend, so we want to enter into short reversal trade.
We set the entry a few pips below the low of the indecision candle, and stop loss a few pips above the highest point of the candle.
While trading, highs and lows are extremely important. If a new low is created from resistance, it indicates the sellers have taken control of price, which means we want to be short.
Stop-loss sits above the high as a break of that high would indicate buyers have regained control of price.
For long trades, you set your entry a few pips above the high of indecision, and a few pips below the low.
It is the simplest form of trade entry, but also one of most effective.
Now that you know how to enter, you need to know where to set the target.
Where to Set the Target
Targets are very easy, and you need to make sure your target comes before the major barriers like the next area of support or resistance.
So, if you enter a long reversal from support, make sure that the target is set before the next resistance area.
The minimum risk to reward ratio used is 1:1.5 R. It means your target has to be a minimum of 1.5 times the size of your stop.
If your stop is 100 pips, the minimum size of the target is 150 pips (1.5 x 100).
If your stop is 75 pips, the minimum size of the target is 112.5 pips (1.5 x 75).
If there is a major barrier to the next support and resistance area in the way of my minimum target I skip the trade.
In the above image, the support area is before my minimum target of 1.5 R is met, so skip the trade.