Reversals are a fact of life in financial markets. Prices always reverse at some point and will have multiple bullish and bearish reversals over time. Ignoring rollbacks can result in more risk than anticipated. When a reversal begins, it is unclear whether it is a reversal or a pullback. Since it is evident that it is a reversal, the price may have already moved a significant distance, resulting in a considerable loss or erosion of profit for the trader.
The main principle of the reversal strategy is to buy in the direction of the price. It is ideal for binary options as trades can be made on lower timeframes and frequent signals. The strategy is built on three powerful indicators: Bollinger Bands, MACD and SMA. You can find all these tools in the Pocket Option terminal.
How to configure the chart and indicators?
To work with the reversal trading strategy, activate a candlestick chart and trade highly volatile assets such as USD or cryptocurrencies.
As for the indicator settings:
- Use default parameters for MACD;
- Use period 22 and deviation 2 for Bollinger Bands;
- Use period 10 for SMA.
Experts advise a timeframe of 15 minutes for the reversal strategy. You can start with it and change it later.
How to apply reversal trading strategy?
First of all, you should expect a strong price movement: all candles will be the same color. Expect 4-5 of these candles to form. Of course, you have two important questions: will the trend continue and when can you buy an option?
Trading is done in patches after price reversals. To see it on the chart, switch from the 15-minute period to the 5-minute period. False signals are also a reality. A reversal can occur using an indicator or price action, but the price immediately resumes to move in the direction of the previous trend again.
How to buy contracts with the reversal trading strategy?
First of all, set up your trading terminal and wait for the impulse movement within 15 minutes. As soon as several candles appear on the chart, switch to a smaller time frame (5 minutes).
- CALL when candles are above the rising Bollinger Bands. The price bounced off the MA (10) in the upward direction. MACD chart is above zero level;
- PUT when the candles are below the Bollinger Bands moving down. The price bounced off MA (10) in the downward direction. The MACD chart is below the zero level.
The expiration period is set equal to three bars on the lower period.
A reversal is a trend change in the price of an asset. A pullback is a counter move within the trend, but it does not reverse the trend. An uptrend is created by higher swing highs and higher lows. Pullbacks create higher lows. Therefore, an uptrend reversal does not occur until the price reaches a lower low in the time frame the trader is watching. Reversals always start as possible retracements. Which one will end up being is unknown when it starts. Traders try to exit positions that are aligned with the trend before a reversal, or they will exit as soon as they see the reversal in progress.
Quotex offers traders a complete set of instruments to set up a successful trading strategy.