Reversal Trading & Traps

Reversal Trading & Traps

Market reversals happen for many reasons and can at times be simply a trap which is something that happens on a regular basis at the London open. This extract from one of London open webinars explains in more detail.

00:00

Webinar introduction and disclaimer

00:00

The webinar begins with a welcome and thanks to attendees for their patience. The host reminds viewers about the disclaimer emphasizing the risks involved in trading and advises against using money that cannot be afforded to lose. A quick audience check is mentioned, noting a diverse group of participants.

00:28

Audience overview and market context

00:28

The speaker welcomes a diverse group of participants including Forex program students, users of quantum indicators, readers of their books, and newcomers. They note the absence of significant fundamental news this morning, despite important news having occurred overnight, and plan to examine its impact.

00:57

Volume price analysis methodology

00:57

The discussion introduces the analysis of the forex market, specifically the Aussie dollar, using volume price analysis (VPA), a methodology developed and used for nearly 20 years. This approach examines price action on the chart in relation to trading volume to understand market participation—identifying who is buying and selling. The key focus is on detecting agreement or disagreement between price action and volume activity. Disagreements, termed anomalies, are considered suspicious and often signal potential reversals in the market. The session will emphasize how to identify and validate these reversals using charts and VPA indicators.

02:03

Fundamental news and market sentiment

02:03

The speaker explains the importance of combining different analysis methods for forex trading validation. Indicators can speed up and simplify analysis, but understanding fundamental news is crucial as it drives price action and potential reversals. Market sentiment, reflected in related markets like indices, also influences forex movements. Unexpected reversals often occur due to overlooked fundamental news or shifts in sentiment in other markets such as bonds or equities, which can significantly impact currency pairs.

03:38

Trap reversals and session crossovers

03:38

The speaker discusses the complexities of trading reversals in the forex market, highlighting various factors traders must consider. They explain the concept of trap reversals, especially around major market openings like London and New York sessions, where high volume and participation create unique trading opportunities. The importance of crossover sessions between financial centers is emphasized, as well as the phenomenon of currency rotation, where strength in one currency pair may be offset by weakness in another. The example of an Australian dollar trade illustrates how local currency dynamics, such as those in the North American session, can influence reversals. The speaker notes that trading reversals involves more nuance than simply buying low and selling high, and suggests approaching learning in small steps while using specialized indicators to manage complexity.

06:31

Indicators for tracking currency flows

06:31

The speaker explains tools used to track currency flows, including a currency strength indicator that shows individual currency performance and potential reversal points. They also mention a momentum-based array to identify downtrending currencies and a currency heat map that provides an overview of pair performances across multiple time frames, reducing the need to check numerous charts.

07:40

The presenter introduces charts to analyze potential market reversals, emphasizing factors like stop-loss placement and position sizing. They discuss validating reversals using volume price analysis (VPA), candle patterns, and support and resistance levels. The segment concludes with a handover to David, who begins setting up charts and checking audio before continuing the discussion.

08:55

Reversal trading advantages and risks

08:55

The speaker discusses reversal trading as a tactical market approach, noting it does not suit everyone. Reversal trading allows entry early in a trend before it fully develops, offering potential for higher profits. However, it requires patience because reversals take time to form, and traders must set wider stop-losses to accommodate this. The trade-off is accepting more risk for potential early gains. Alternatively, some traders prefer entering trends after they are underway, which allows for tighter stop-losses but misses the initial move. The speaker emphasizes that trading tactics depend on individual temperament and style. Traders may use a variety of approaches or specialize in one tactic across different markets or currency pairs.

11:22

The speaker passes control back to Manish, noting that the market is quiet with little activity until the afternoon. They highlight that in such times, trading decisions rely heavily on chart analysis unless unexpected events occur. The current market tone is set by the charts, underscoring the importance of technical analysis during low-activity periods.

11:54

Impact of China news on Aussie dollar

11:54

The morning market activity has been influenced by two key releases from China, which significantly impact the Australian dollar. The speaker highlights that the Australian dollar experienced notable sell-offs due to disappointing Chinese economic data. This segment also introduces a comprehensive Forex program that covers chart analysis, fundamentals, related markets, and trading psychology, emphasizing the importance of understanding these economic indicators.

13:06

The Chinese factory deflation indicates falling prices due to weakened demand amid the pandemic, signaling negative implications for the global economy. This economic pressure is reflected in slight declines in the S&P and Nasdaq futures. With no significant European news, market participants are advised to focus on chart analysis for potential trading opportunities. The speaker also mentions a preferred trading pair involving the Australian dollar and plans to review current technical indicators to assess market extremes.

14:51

Currency strength and chart analysis

14:51

The speaker explains how using an extreme value indicator helps quickly identify which currencies and currency pairs to focus on, saving time compared to analyzing many charts. They use the hourly chart as a benchmark while trading on shorter timeframes, noting that the Australian dollar (Aussie) has strengthened following positive Chinese news. Despite some fluctuations, overall market sentiment remains positive, with indices recovering from earlier declines.

15:55

The discussion highlights a V-shaped rally in the market indices, acknowledging that rallies are often followed by pullbacks and corrections due to changing sentiment and fundamental news. Some view these rallies as artificial and disconnected from the real economy, but traders focus primarily on price movements to make buy or sell decisions. Long-term investors face more uncertainty in the current market environment.

16:53

Currency movements are described as somewhat subdued, with the British pound showing little activity due to lack of news during the London open. The Aussie yen pair attracts interest due to distinct moves: the Aussie is bought when sentiment is positive and sold when negative. The speaker points out that the Aussie’s behavior is a key factor for spotting potential currency reversals, supported by consistent trends seen in the euro and Aussie on hourly charts.

17:58

On the 15-minute chart, recent overnight movements have pushed the Aussie higher, reflecting current market dynamics. Attention is drawn to unusual currency pairs such as New Zealand Swiss and Swiss yen, which are not commonly traded but involve safe-haven currencies. These pairs could signal reversals. Indicators show the euro rising while the yen declines, suggesting potential shifts in currency trends that traders should monitor closely.

19:02

Interpreting divergences and timeframes

19:02

The speaker discusses the current market conditions where the indicators show divergence rather than a reversal, suggesting patience is needed. They highlight activity in the euro and yen, noting a positive move in the euro yen pair that hasn’t reached an extreme yet. Divergence on slower timeframes is seen as a positive sign, potentially indicating early trends or setups for reversals.

20:11

Analysis continues with an observation that fast timeframe movements appear to be mirrored in slower timeframes, indicating a possible emerging trend. However, the speaker cautions that reversals seen on faster timeframes might be short-lived if slower timeframes hold more influence, often resulting in pullbacks or corrections rather than full reversals. They emphasize the importance of weighing different timeframe signals.

21:15

The speaker shares insight from a trader who operates with large futures positions on fast timeframes, seeking only small gains of a few ticks. This highlights that reversals can be profitable even within consolidation phases, depending on the trader’s goals and strategies. Ultimately, how the information is used depends on individual trading preferences and objectives.

21:48

Trading decisions and validation techniques

21:48

The speaker emphasizes that there is no definitive right or wrong way to trade the market; ultimately, traders must make their own decisions based on the information provided. They plan to analyze the Euro Yen currency pair in more detail and also examine the Euro Australian Dollar pair using NinjaTrader. The focus will be on reversals by combining candlestick patterns with support and resistance levels.

22:51

A recent example involving the Euro Australian Dollar is discussed, highlighting a strong market reaction following Chinese news that caused a sell-off in the Australian dollar. The price hit a significant reversal level identified by the R4 pivot on the Camarilla system, also confirmed by the CSI indicator. This combination of technical signals helps validate the reversal’s legitimacy.

23:30

The speaker concludes by handing over to David, indicating that a detailed review of the Euro Yen market will follow.

By Anna Coulling – creator of volume price analysis