The idea of a reversal is something that writers are all too familiar with. The term “Reversal” comes from the world of credit markets and has meant a sudden shift in sentiment following a period of rising prices. But what is this sentiment, why is it important to know when one is coming, and how can readers predict these events?
In general, there are three types of sentiment; bullish (when prices rise), bearish (when they drop) and mixed (when they fluctuate). The appearance of the dragonfly doji candlestick has traditionally been used to identify bullish sentiment, while the appearance of the doji signals bearish sentiment. They are both easy to identify and powerful indicators that can be used to predict impending reversions.
These signals are arguably the most crucial part of trading because they warn that a big move will happen. These technical analysis signals, news or fundamental events are the building blocks for determining how far or how quickly a market can move in either direction.
The most important thing to understand is that market reversals are merely a change in sentiment, and as such, they don’t always have to mean a sustained drop or rise in the market.
How to Know When a Reversal is Coming
There are many ways that readers can determine when a reversal is coming. Some of these include;
- News events – This can include significant political changes, trade agreements, sanctions or even the introduction of new products into the marketplace.
- Economic reports highlight how well the economy is doing and whether it is due for a correction.
- Technical analysis – This will highlight how the market might behave and what might happen.
- Analyst opinions – The way that a financial analyst sees the market and makes predictions about it.
- Company earnings- thse are the most crucial aspect of how the market can move and how it measures performance.
Basic Reversal Signals
Some basic signals are used to indicate a market reversal. If you follow these indicators, you will be able to determine whether or not a market is likely to return to its stable state soon or if it will continue to fluctuate until it finally sinks.
Head and Shoulders
This is one of the simple yet highly effective reversal signals. This indicator comprises two peaks that are separated by a valley. In this way, there are three potential heads and three potential shoulders on the chart. The signals show that if the market is in an uptrend period, a reversal would be expected, followed by an upswing with the likelihood of a temporary top. If there is an uptrend, then the price should drop to test this level, and if it does, this will confirm a reversal.
The bearish reversal is the opposite of the head and shoulders indicator. In this case, the market is in a downtrend, so prices should rise to test this level, but if they don’t, this shows that a reversal will have occurred. If there is a general downtrend, price action should drop at least to test previous support levels before continuing higher.
The bullish reversal pattern is another simple indicator that uses trend lines to indicate future market movements. In this case, a horizontal support line is drawn at the bottom of the market. At some point, it will be broken, and if it isn’t, then a bullish reversal should occur where the price returns to test this level before rising.
Cyclic Trend
This is a pattern based on the idea that markets tend to go through cycles. This pattern works because a trough separates two tops. Depending on how high the price reaches, these patterns can be short or long. As long as the price is testing these levels, it remains in a downtrend, so a reversal may not be expected, and if it does, this confirms that the market has reversed. However, if the price breaks through support or reaches higher levels, this demonstrates a bullish reversal.
Multiple Tops
This is a complex indicator and is sometimes called the “take-off” pattern. This pattern is quite difficult to trade because it does not always occur. However, when it does, this pattern can indicate a significant reversal. In this case, the price of an asset reverses three times, at which point a fourth reversal occurs. This is often a definitive turning point where the market becomes bearish and declines.
Hidden Bearish Reversals
– These are bearish indicators that are difficult to see in real-time, but they can be found in hindsight after they have happened. These signals can be used to confirm what might have occurred in real-time, but there are other methods of using this data.
Conclusion
Most market readers can use dragonfly doji candlestick signals effectively to determine whether a market has reversed and how such a reversal might play out in the future. As long as you stay on top of the news, fundamental reports, technical analysis, and analyst opinions, you will be able to understand the trends that will allow you to pick up these signals
