Trend reversal line
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- Market Reversals and How to Spot Them
However, in case the test occurs with a lower low, the latter may mark the beginning of the first leg, while after this first leg a pullback may follow and then a second leg. In the case with a reversal to the downside a lower high test would be the beginning of the second leg, while a higher high test would be the beginning of the first leg. The case with spikes Sometimes the countertrend move may be of considerable strength, a spike, which does not have pullbacks.
This spike may appear to serve as a trend reversal, but after that a resumption of the original trend may follow. If the resumption is comprised by enough bars and corrects a large portion of the spike, some traders may begin to wonder whether this is a failed reversal and not a pullback, following an actual successful reversal. Extremes of most sharp moves, which are followed by deep corrections, are eventually tested and even surpassed.
Trend reversal tests
Let us have the following situation. A huge move to the downside occurs, followed by a correction up, which retraces a trend reversal line portion of the spike.
This move is usually accompanied by another sell-off, which tests the bottom of the first spike. From this point on the original trend may resume a double bottom bull flag will be formedthe reversal of the original trend may continue to the downside, or trading may become sideways.
Determining Trend Reversals on the Indicator-Free Chart
The chance of a test is far greater, if the sudden move occurs within a trading range or it is in the same direction as the original trend a spike down during a downtrend. A test is not likely to occur, if it involves a countertrend move during a strong trend a sharp spike up during a strong downtrend may only trap buyers and not be tested.
There are climax reversals, which are not necessarily followed by a pullback, testing the prior extreme. This may be the case with an overshoot of the trend channel line and a reversal.
These climaxes can be seen often on smaller time frames. For trend reversal line, the 1-minute chart may show several climaxes each trading day.
A sequence of trend bars with large bodies, small wicks and little overlap between them, followed by a pullback, has almost always a test of its prior extreme level.
Tests of prior trend extremes can be two-legged
On the 5-minute chart of Crude Oil above bar 3 low tested and exceeded the low of bar 1, but no actual reversal followed and the down move lasted for a few more bars. On the 5-minute chart of AMZN above bar 5 low tested and exceeded the prior low in the bear trend.
A test by a lower low usually leads to at least two-legged countertrend move and that is what occurred in our case. There were two moves to the upside from bar 5 and bar 7. Bar 7 was a higher low, which came after the bear trend line from the prior trading day was broken. As it was a higher low, bar 7 marked the start of the second leg and the completed leg itself marked the end of the up move.