Step 3: The Trend Reversal Event
So now we’ve got a trend, and we’ve got an indicator or chart pattern telling us that a trend reversal might be on the cards.
Now we are onto stage 3 of the 5 stage process. We’re getting down to business now.
So what’s a “trend reversal event”?
A trend reversal event is as follows:
it’s a specific set of circumstances that, once they happen, it tells you that a trend reversal has occurred.
This is not something you can make up as you go along. You have to define it in advance. If you wait until you are in the middle of a moving market, and money is on the line, your ability to make clear decisions will be clouded.
Here are some example trend reversal events for each of the indicators mentioned above:
When the 20 day moving average crosses the 50 day moving average on the daily timeframe means that the trend has reversed.
Chart Patterns
A candle close beneath the head and shoulders neckline on the daily chart means that the trend has reversed.
Candlesticks
A close below the most recent up candle on the daily timeframe means that the trend has reversed.
Notice how each of the above events refer to a daily close candle. There’s nothing magical about the candle close – it’s just that it’s a clear, obvious event. If it happens, you can’t argue about it.
You can change these events to whatever you want. It could be a different timeframe, different level to breach, whatever. The only thing that is necessary is that when it happens, it’s obvious.
Now, this doesn’t necessarily mean that the market is going to collapse and steam off to the downside. It’s just an indicator that the bullish power behind the trend is weakening. This could prompt a move to the downside, or the market could also start to range for a while.
No second-guessing.
It either happens or it doesn’t.
Now onto the next part – this one is important.
So now we’ve got a trend, and we’ve got an indicator or chart pattern telling us that a trend reversal might be on the cards.
Now we are onto stage 3 of the 5 stage process. We’re getting down to business now.
So what’s a “trend reversal event”?
A trend reversal event is as follows:
it’s a specific set of circumstances that, once they happen, it tells you that a trend reversal has occurred.
This is not something you can make up as you go along. You have to define it in advance. If you wait until you are in the middle of a moving market, and money is on the line, your ability to make clear decisions will be clouded.
Here are some example trend reversal events for each of the indicators mentioned above:
- Higher Highs and Higher Lows
- Moving Averages
When the 20 day moving average crosses the 50 day moving average on the daily timeframe means that the trend has reversed.
Chart Patterns
A candle close beneath the head and shoulders neckline on the daily chart means that the trend has reversed.
Candlesticks
A close below the most recent up candle on the daily timeframe means that the trend has reversed.
Notice how each of the above events refer to a daily close candle. There’s nothing magical about the candle close – it’s just that it’s a clear, obvious event. If it happens, you can’t argue about it.
You can change these events to whatever you want. It could be a different timeframe, different level to breach, whatever. The only thing that is necessary is that when it happens, it’s obvious.
Now, this doesn’t necessarily mean that the market is going to collapse and steam off to the downside. It’s just an indicator that the bullish power behind the trend is weakening. This could prompt a move to the downside, or the market could also start to range for a while.
No second-guessing.
It either happens or it doesn’t.
Now onto the next part – this one is important.
