In the video below I enter a bearish EUR/USD reversal trade. The set-up was straight forward, bullish preceding trend followed by indecision on a resistance area. Below the video I explain this trade in detail.
Trading Reversals – Transitions of Power
If you have gone through my free Price Action Strategy you will know exactly how I trade reversals. The main concept behind my strategy is that reversals come in three parts:
1. Preceding trend.
2. Indecision.
3. Reversal trend.
The preceding trend is a strong bullish or bearish trend. When the preceding trend meets a support and resistance area indecision forms. After the indecision the reversal trend forms and I enter a reversal trade. The EUR/USD trade in the video above had this pattern.
In the image above you can see that EUR/USD bounced from the 1.2950-1.2970 support area and spent all of Monday climbing up. This was the bullish preceding trend.
EUR/USD then hit the 1.3040-1.3060 resistance area and stalled. We can see that once the resistance area was hit candles the candles got smaller. This indicates that the Bulls are losing control of the market and that the Bears are fighting for control. A resistance area is also known as a sell area because there are large groupings of sellers at resistance areas. When the Bulls ran in to this resistance area sellers flooded the market and stopped the bullish trend.
After the indecision the Bulls lost control of the market and the Bears gained control. This is what I mean by ‘transition of power’. At first the Bulls had the power and they pushed price up. However, when the Bulls hit resistance a transition of power occurred and the Bears gained control. Trading reversals is simply about spotting transitions of power and exploiting them.
The entry for this trade was placed just below the two indecision candles at 1.3045. I entered this trade a little late at 1.3039. For more information on how I calculate targets and stops check out my strategy for free section.