Identifying Major Price Reversals

06/10/2013 6:00 am EST

Focus: FOREX

Marc Principato

Director, SMB Forex training Program

Veteran currency trader Marc Principato of SMB University Forex Training Program explains why it is important to be cognizant of technical conditions on larger time frames in order to anticipate reversals.

Just a couple of weeks ago, the EUR/USD and GBP/USD looked as if they were going to zero. The media and experts were citing all kinds of bearish facts and fundamentals. If you look at the prices now, both pairs have dramatically reversed and are showing nothing but signs of strength. What happened? Were you distracted by all the “experts”? How do you know when a financial instrument is about to turn?

It all begins with being strongly aware of technical conditions on your larger time frames. Keep in mind that no one can predict a top or bottom of a market consistently before it is established. As speculators, it is our job to listen and observe market conditions and recognize when the market is ready to change. What can help us accomplish this?

Price action analysis. Many inexperienced traders overlook or undervalue the information that this technique can yield. For example, go pull up a four-hour chart of the GBP/USD. You will notice in the two-three weeks of May 2013, it was selling hard. Lower low after lower lower. It went from 1.5600 area to test 1.5000 relatively quickly. Soon after that, over a two-week period, it retested 1.5000 and it is now near 1.5400. It took two weeks for this pair to put in a significant bottom. That means you will never see this coming on a five-minute chart.

Once such a bottom is in place, it is time to recognize that whatever was driving this pair lower is no longer acting on it. It also means that short signals become very risky and irrelevant. If you do not adjust your expectations after facing a structure of this kind, you will find yourself on the losing side of many trades going forward.

So to summarize, in order to capitalize on this kind of information, you need to be able to understand chart patterns on a psychological level, have the patience to wait for their emergence, and employ a process to validate what it is implying. If you are missing any of these elements, trading becomes more of a frustrating series of gambling attempts.

By Marc Principato, CMT, Director, SMB University Forex Training Program

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