Price Action Market Reversals Explained – How to Take Advantage
What is your job as a price action trader?
Do you ever ask yourself that or ever think about it? Or do you just get on with your daily routine and the tasks you have to do each trading day?
Why do I start a lesson with asking these questions to you?
The answer is because price action trading is far more than marking our major support or resistance levels and then just lining a trigger signal up at a key level and entering. A lot of traders however have slipped into the notion that once they mark their level, find an A+ trigger signal, ‘Bob’s their uncle’. Or in other words, all is good and their job is done.
But this is not the case at all. Just like I teach you in the trading strategies section of the site, there are many different facets to reading the price action story of a chart and learning how to bring them together.
Just two of the lessons in the strategy section are:
- Trade Forex Like a Sniper From Kill Zones – that teaches you how to hunt high probability trade setups from kill zones in the Forex markets.
- The Secrets Traders Can Use With Candlesticks & Price Action – teaches you how to read the finer points and clues of price action such as how to look at where price can and importantly where price cannot close which is often crucial information and determines where price is about to move and you can take advantage if you understand it.
The King of the Story
To be a price action trader you must read and understand the price, and all of the chart. It’s your job to put all the clues that price is giving you into a blender and then come out with beautiful tomato soup (or fruit smoothie depending on your taste).
Price action is KING. Remember that and use it in your trading. Not patterns and not signals or triggers. The signals and the entries are super important, but it is the overall price action story that is the king of the jungle.
“Price action is KING”
To make the story you need to read the whole chart. A really common question I get when traders are marking their support and resistance levels is “how far back do I go on my chart to mark my level?”. The answer is that you should read the WHOLE chart and go as far back as the chart allows.
You will notice that levels going back 20 years are still coming into play in today’s markets and still continue to form part of today’s price action story.
NOTE: From here on in the trade lesson I will be using the same theoretical trading example for ease of explanation. This trade is a “Downtrend trade setup”.
What is a Price Action Market Reversal?
A ‘normal’ or textbook reversal, where price makes a new move against a trend or momentum that has been in place for a period of time, rarely happens in just one candle. Normally price would need to build momentum and price action order flow – for this, price typically builds a consolidation at the highs or a base at the lows.
Something that I’m often teaching in the “Charts in Focus Daily Forex Commentary” is how the market reverses against a recent move in the market, and in particular how it reverses differently to what most traders actually expect. This is because it is a market rule and price action order flow pattern that comes up time and time again
It is very common for traders to think that price reverses in just one or two candles by simply hitting a level and then ‘reversing’. Whilst this does happen occasionally, it’s rare and doesn’t normally occur like that.
How Price Forms a Base
What price will often do before looking to make a reversal against the market trend or against recent momentum is move into a consolidation. This is to build the required order flow and new momentum to change direction against the current trend.
Look at the picture I have attached for you below of the bull and bear fighting to see who has control. Basically; what they are doing is tussling each and every day with the bull pushing back against the bear and the bear jumping back.
The bulls (buyers) and bears (sellers) are in a constant tug-of-war and playing a never-ending game of supply and demand. If price is moving lower it means that the bears or sellers have control of the market.
[Tweet “The bulls (buyers) and bears (sellers) are in a constant tug-of-war and playing a never-ending game of supply and demand.”]
If price is to move back higher, the bulls or buyers would need to take back control. The reason that price does not in a lot of cases turn around in just one candle is because if price is in a downtrend, it means the sellers control the market and the order flow. For this to change and price to turn around, the buyers have to tip the scales so they’re the ones in the dominant position.
On a price action chart, price will often move into a consolidation period and begin a windup or a stall. As you can see on the chart below, after being in a downtrend, price starts to form a base and to consolidate.
CHART EXAMPLE: Price forming consolidation and moving into a box
Price Will Often Make 2 x Attempts or Continue
Price will bounce off a support or resistance: this should alert you to the potential that price may be looking to make a move against a trend or momentum.
This is only a retrace or rotation, so at this stage you should be still looking to trade in-line and with the trend. You should wait to see if this bounce moves back to a value area that you can look to ride the next wave of the trend.
Keeping in-line with our example of the downtrend for this lesson, the bears/sellers in this trend in most cases are going to want to make another attempt to keep their trend going. When price retraces higher, they will jump in and sell short. You can too as this is normally the value resistance price flip area.
These bears will attempt to continue this trend by making a new lower low and pushing price down. It is unbelievable how often price makes a new and fresh higher high here to start things and these bears fail. This is telling.
Basically this is the bears or sellers making two attempts at pushing price lower. On the first attempt price found support, and on the second, price made a fresh higher high. You are looking for the same price action pattern and price is in an uptrend. The only difference is that you will be looking for price to be making a new lower low.
CHART EXAMPLES: When price rotates higher you will see price on the chart fires off a Bearish Engulfing Bar = BEEB. At this stage we should still be looking to get short with the strong trend lower and not looking for any long trades against the trend as we do not have any where near enough information that price is reversing.
Price now moves lower with the trend once again and makes another attempt to continue the trend which it fails to do and this is where the new higher high is formed.
CHART EXAMPLE – Bearish Engulfing Bar
CHART EXAMPLE – New Fresh High
Looking for Breaking New Highs or Lows
I am going to keep with the same downtrend example we have been using through this lesson as it is easiest for explanation purposes. After price has formed the fresh higher high against the trend lower, the next major piece of the puzzle we are looking for before we even contemplate making a long trade in this market is ‘where is the major level?’.
Now that price has formed the new high it will begin to build momentum and begin to move higher with more and more trades piling into it, but there will be a major resistance overhead and nothing in this market will happen until this level has broken
It is very common that this level will be the exact same level that price would have retraced to or found value at where it bounced the first time.
This level is CRITICAL and you need to read it and use it. What price does at this level and where it goes is going to determine where this reversal goes and how you play this pair/market, so you really need to understand this major level and how to read it.
CHART EXAMPLE – This is the Major Level You Need to Keep Eye On
Trading Opportunities – Re-testing the Price Flip Level
Once price has broken and CLOSED above the resistance level you can then begin looking for long trades with the new momentum higher.
You could begin to hunt for high-probability price action long trigger signals at the new support price flip, should price make any quick retracements back into the old resistance and new support area.
I have a lesson on how you can make super high-probability trades setups on smaller intraday time frames as soon as price makes a quick rotation back into the first test area. You can read this lesson at:
The chart below illustrates how price has broken out higher and through the major daily resistance level. You could then potentially look to hunt long trades should price make any rotations back into the old resistance/support price flip area. Check out the chart below.
CHART EXAMPLE – Hunt For High Probability Quick Pull-back Setups
Price Action Reversals
Keep in mind this is just one type of price action reversal and is not the only way price reverses.
Another reversal you can learn and use in your trading is the 1,2,3 reversal which I have linked up for you and I teach in the lesson that is below in the footer related lessons.
As I alluded to and discussed at the start of the lesson; as a price action trader it is your job to learn, read and put together all the clues on the price action chart.