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Today we will talk about such a phenomenon as trend reversal point. This is one of the core topics for traders; lots of them
are in a constant search for most exact trend reversal indicators but only few
succeed. The topicality of the issue is very well explicable by the fact that
the trend reversal point is simultaneously the best entry and exit market
point.
So, in this article we will not only discuss the most popular
trend reversal indicators but also the very possibility of existence of such.
Trend indicators and oscillators
If this is not your first day in the market, you must be already
familiar with these two types of indicators and know how to distinguish between
them. Trend indicators are those that react to trend changes slowly but for
sure signal about any lengthy market movement.
On the other hand, oscillators react to any changes much
faster but in lengthy movements give quite a bunch of false reversal signals.
This difference creates a dilemma as to which type of indicator
is more reliable – a slow but exact one or a faster but less accurate one.
The
correct solution is a symbiosis of the two types; but as long as we are
interested in only one indicator, we will look deeper. However, you need to
realise from the start that there is no perfect indicator at all, it can just
be set up perfectly for you.
Trend
indicators
It seems that trend indicators are literally meant for detecting
the trend. However, the problem is that such indicators are more for detecting
the current trend instead of finding reversal points.
So, a question rises,
whether such points can be at all found by trend indicators.
The answer is yes
but it calls for proficiency and experience.
Moving Average and Alligator
One of the best trend indicators is the Moving Average; it is the base for almost all other trend indicators.
Depending on the period of the MA, it allows for detecting minor and major
movements.
It can also be used for finding reversal points: the reversal of its
line will mean a trend reversal. However, the period of the MA is important
here: the longer it is, the more accurate signals the indicator gives. Yet
these signals will be rare; also, mind the timeframe.
Alligator indicator is the same Moving Average but three lines at once, shifted
against the market.
Oscillators
If the only thing we care for is reversal points, oscillators
will be the best option. The only problem is that they are very sensitive,
showing a lot of false reversal points in even trends; however, in flats they
can be extremely useful, yielding serious profits.
Stochastic Oscillator and MACD
These are two most popular oscillators that can help to find
reversal points; but as you see, they react very aggressively to all price
movements, even in flats. Hence, use of oscillators in trading might lead to
losing the deposit if you happen to get into a lengthy trend.
Closing
thoughts
Clearly, there is no one and only exact trend reversal
indicator. The best one will be the one that perfectly suits your needs and
yourself; not only your indicator will make mistakes but you will also make
them, trying to interpret the signals. Anyway, I wish you care in trading and
good luck.
By Andrey Goilov, RoboForex Analytical Department
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