Trend reversal: causes and signs.

Trend following has always been a priority in Forex trading. Simply open a trade and you're guaranteed a profit. This would be the case if not for the so-called trend reversal.

This is precisely the reason why most deposits are lost and the largest drawdowns occur. There can be many reasons for a reversal, but the result is always the same: losses.

A trend reversal shouldn't come as a surprise to you. Only then will you be able to close a trade with minimal losses. To do this, you need to clearly understand when and why price changes direction.

First, you need to understand what a "trend reversal" means—it's a situation where the price begins to move in the opposite direction to its recent movement. Moreover, the magnitude of this movement already exceeds the maximum possible correction for a given time period.

For example, there is an upward trend on H1, and the maximum forex correction during the session was 15 points, but the price of the currency pair begins to fall and has already passed 30 points, with a high probability a price reversal has occurred.

Reasons for trend reversal.

There are several possible causes for this phenomenon:

Fundamental factors – the release of strong news that significantly impacts the exchange rate;

Market conditions – the market has reached the maximum possible overbought or oversold level, leading to a large number of orders entering the market against the existing trend;

and a sharp change in supply (demand) – a large amount of a particular currency has appeared on the market, or, conversely, someone has begun buying a certain currency en masse.

Any of these events can cause the price to change direction sharply, so controlling these three factors allows you to make a timely decision to close a trade.

However, in real-world Forex trading, you can only monitor news releases; control over other factors is not available on a virtual exchange.

Signs of an upcoming trend reversal.

As noted earlier, the main indicator is a significant movement against the existing trend. A sharp price jump over a short period of time or the formation of a price gap ( a Forex gap ) can also be considered a reversal signal. A significant breakout of a support level during an uptrend or a resistance level during a downtrend is also possible.

A stop-loss order remains the primary insurance used to protect the deposit from being completely wiped out in the event of a trend reversal .