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
