Reversal patterns state that a continuation pattern is going to end. On your next road trip, you might decide to backtrack slightly because you missed a place you wanted to see or there was no hotel ten minutes north from your previous location. Reversal patterns in foreign exchange trading can seem a bit like a road trip since you might see price patterns back track for various reasons including profit taking.
Defining Foreign Exchange Trading Reversals
You are on a special holiday in Juneau, Alaska. You have a couple of days in town, so you decide to rent a car, but you do not realise there is really nowhere to go out of the capital city. Instead, you take one road out to the Mendenhall Glacier and end up at the end of the road. Next you take another road to Auke Bay and find that road ends about 20 miles from the starting point. Yet, there was a second path that took you on a scenic drive making it a little longer trip. You decided to reverse direction and go back through downtown only to wind up at another “end” of the road. Going over to Douglas Island you go into town and then reverse going opposite of town. All these roads lead to dead ends that reverse. In foreign exchange trading you can have many roads, but they eventually end. This is because trends will end, often reversing to create a new trend. While there are points of consolidation in which you can go up and down in the trend, you eventually see an end where a new high or low is attained before a reversal occurs.
This is the best definition of reversal: knowing that you still have a “road” to go on, but you might have to reverse. For example in our Alaska talk you could get to the end of the road, decide to reverse to St. Teresa Shrine, but find out your B&B is back up towards the end of the road. In foreign exchange trading you might go up to a new high, reverse to a middle low and then try to reach the new high again only to fail.
Discovering Foreign Exchange Trading Reversal Patterns
In reversal pattern jargon you have to identify what is happening. There are four points you should look for: old trend, consolidation zone, breakout point, and new trend. The old trend might be going out past Auke Bay, where you hit a consolidation zone at the shrine. You then break out to continue in the same trend hitting the end of the road. But you might have decided the shrine was all for the day on that old trend, so the new trend after the breakout is a reversal back towards the capital. Foreign exchange trading can be like this where you have old and new trends that continue in the same pattern called continuation or you have a reversal in which the new trend is reversed from the old trend to create a new path to profit for you.