Facebook - How To Trade Trend Reversals

Sometimes entry in a market against the main trend can be very profitable. But for opening such trades we must have solid reasons and very strong signals. One of the most reliable trend reversal signal is based on divergences.

What is a divergence? It's a situation when the price diverges with the movements of oscillators such as RSI, Stochastic, MACD mainly. There are bullish and bearish divergences, standard and hidden. Sometimes you can face with double divergences where the market forms 3 tops/bottoms but not 2 like with standard divergences.

I prepared an example of a standard bullish divergence from Facebook market. I hope you will get a better understanding of how to trade based on divergences

The price bounced from 123.00 level and RSI confirmed the price reversal. We got a new swing low which was lower than the previous one. But RSI made a new swing low higher than the previous one. It means that the price diverged with RSI and we got a bullish divergence. The same goes about the price and MACD lines.

This bullish divergence could be used for opening long positions against the main downtrend based on the trend reversal signal. Entry level could be above the local swing high after the divergence - it's 136.50 level. As you can see the market made a good upward movement. It could give you a profit!

Also, I advise you to look at DMI indicator. How it moved in the period of bullish divergence forming. ADX line made new swing high lower than the previous one. We got a signal that bears became weaker and the market had no power for moving lower.

Divergences can be used in different markets and timeframes.

Divergences, as well as reversal chart patterns, allow trading against the main trends. In other cases, trading against the main market movements - it's a very unprofitable idea!



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