Reversal Strategy

If you’re new to the world of trading and looking for an investment strategy that doesn’t take a lot of expertise to master, the reversal strategy is an excellent starting point. When you get down to the heart of this strategy, it basically only involves studying an asset’s trading chart and spotting the moment when you believe the price movement will change direction.

 

Naturally, trends are not neat and tidy. The value of an asset can fluctuate, so while the reversal strategy is seemingly simple, actually putting it into practice does take some work and a keen eye. You’ll need to study a combination of long and short term financial charts in order to spot trends and then be able to accurately track price movement to accurately predict when the price will move from an upward to a downward trend or vice versa.

 

In trading, payouts are greater when you choose an option that seems more risky, or in other words, less likely to occur.

 

For example, let’s say that you were trading an asset in the middle of a prolonged upwards pricing trend. When you go to place a trade, you’d be likely to see that the payout for an “Up” option would be lower than the payout for a “Down” option because the strong upwards trend would suggest that the pricing would continue to climb. As a result, if you were able to anticipate a reversal at the right time, you would have the chance of reaping a handsome payout. The earlier in the reversal, the higher the payout is likely to be.

Blurred Trade

To get the best possible results with a reversal trading strategy, you want to be one of the first to realize the price direction is about to move. It’s really not possible to do that if you’re only looking at movements on a chart. By the time the reversal is visible, the payouts will typically have been lowered already.

 

The best way to approach research for a reversal strategy is to use technical indicators to help you anticipate reversals. A number of different indicators are useful for spotting reversals. One of the simplest indicators is the Relative Strength Index or RSI. This indicator allows you to see if an asset is being over bought or over sold.

 

Because over selling can typically not be sustained for long periods of time, an asset that scores below 30 on the RSI is likely to soon decline in price. Similarly, an asset with an RSI level of 70 or above is being over bought and will likely rise in price in the near future. The easiest way to add Relative Strength Index indicators to charts is to use a charting software program.

 

It’s important to remember that even if you combine good real time financial charts with one or more technical indicators, it’s still possible for the actual price movement of an asset to move in a different way than you anticipate. Even with the reversal strategy properly employed, there will remain a high risk for losing your investment when you make a trade, but it is possible to lower your risk by adopting the strategy.

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