What is Reversal Trading?
Reversal trading is a strategy that attempts to identify the point where a trend changes direction, entering positions at the beginning of a new trend for maximum profit potential.
Reversal Trading Explained
Reversal trading offers the highest reward but also the highest risk. You're essentially trying to catch a falling knife or fade a strong trend. Successful reversal traders look for multiple confirmations: divergence, candlestick patterns, volume climaxes, and support/resistance levels. Position sizing should be smaller for reversal trades due to the higher failure rate.
Real-World Example
A stock has been declining for weeks and hits a historically significant support level. RSI shows bullish divergence and a hammer candlestick forms. A reversal trader buys a small position with a tight stop below support, targeting a move back to the previous trading range.
Related Terms
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