3 Signs That Tell You Exactly When The Trend Is OVER...(Reversal Trading Strategy)

Summary

In this video, Steven shares a powerful strategy for identifying when a trend is over in Forex trading. He outlines three key signs: 1) A major level of structure on a higher time frame, 2) RSI indicator signaling overbought conditions or divergence, and 3) Candlestick or chart patterns, like a double top, confirming the trend reversal. Steven walks viewers through applying these signs to maximize profit by exiting trades at the right moment. He also introduces his CEST strategy (Conditions, Entry, Stop, Target) for a rules-based approach to both continuation and reversal trades, emphasizing consistency for long-term success.

Takeaways

• 😀 The first sign that a trend is over is the identification of a major level of structure on a higher time frame (e.g., daily chart for a four-hour trade).
• 😀 The second sign involves using the RSI indicator on the higher time frame to spot overbought conditions (above 70) or divergence, signaling a trend reversal.
• 😀 The third sign is a candlestick or chart pattern, such as a double top, that forms within the zone of a major structure level, indicating the end of the trend.
• 😀 After identifying the three signs, you should aim to set a target at a significant level of structure while using a 1.4:1 risk-to-reward ratio to manage trades.
• 😀 To maximize profits, always adjust stop losses to break even once the price reaches a 1.4:1 risk-to-reward ratio.
• 😀 For reversal trades, the same three signs apply but with the conditions flipped: support levels, oversold RSI, and bullish chart patterns like double bottoms.
• 😀 The CEST strategy (Conditions, Entry, Stop, Target) forms the foundation of creating a rules-based approach for consistent trading results.
• 😀 The conditions for reversal trades include finding a higher time frame structure, confirming RSI overbought/oversold or divergence, and waiting for a reversal pattern like a double top or bottom.
• 😀 For the entry, look for selling pressure (e.g., a red engulfing candle) after confirming the trend reversal signs.
• 😀 Set stop losses using the ATR (Average True Range) indicator, placing the stop loss above the pattern by one ATR distance to account for market volatility.

Q & A

What are the three main signs that a trend is over in trading?

The three main signs that a trend is over are: 1) A major level of structure on a higher time frame, 2) RSI (Relative Strength Index) showing overbought conditions or divergence, and 3) A candlestick pattern or chart pattern, such as a double top or bottom.

How does the major level of structure on a higher time frame help identify a trend's end?

A major level of structure on a higher time frame indicates a significant resistance or support level where price could reverse. By identifying such levels, traders can anticipate that the trend might end when price reaches these zones.

What is the role of the RSI in determining if a trend is over?

The RSI helps identify overbought or oversold conditions in a market. When the RSI is above 70, it signals an overbought condition, suggesting the trend may be over. RSI divergence, where the price is making higher highs while the RSI makes lower highs, is an even stronger sign of a trend reversal.

What is RSI divergence, and why is it important for spotting a trend reversal?

RSI divergence occurs when the price forms higher highs, but the RSI forms lower highs. This signals a weakening of the trend and is often a reliable indicator of a potential reversal.

How do candlestick patterns or chart patterns, like the double top, help in identifying a trend reversal?

Candlestick patterns or chart patterns such as the double top (for bearish reversals) or double bottom (for bullish reversals) indicate a change in market sentiment. When these patterns appear at key support or resistance levels, they suggest that the trend is likely reversing.

What strategy does the trader use to set profit targets after identifying signs of a trend reversal?

The trader sets profit targets by identifying the next major level of structure on the higher time frame (support for bearish trades, resistance for bullish trades). The trader then manages the trade based on price reaching this level and the RSI showing oversold or overbought conditions.

How does the trader use the CEST methodology in creating a reversal strategy?

The CEST methodology stands for Conditions, Entry, Stop, and Target. It helps in creating a rules-based strategy by defining the conditions under which a trade is entered (such as a level of structure, RSI conditions, and chart patterns), setting the entry point, defining the stop loss, and identifying the target level.

What is the purpose of using the ATR (Average True Range) indicator in setting a stop loss?

The ATR indicator helps determine the volatility of the market. By using the ATR, the trader can set a stop loss that accounts for the market's average volatility, reducing the likelihood of being stopped out prematurely during normal market fluctuations.

Why does the trader prefer to use a major level of structure on a higher time frame for setting targets?

Using a major level of structure on a higher time frame ensures that the target is based on significant price levels where price has historically reversed. This helps increase the accuracy of the target and provides a logical area to take profits.

How does the trader manage the position once the target zone is reached?

Once the price reaches the target zone, the trader monitors the RSI for oversold or overbought conditions. If the market conditions align with the reversal signs, the trader may exit the position. If the price continues moving favorably, the trader can lock in profits by adjusting the stop loss or taking partial profits.