2. Reversal strategies

Continuation strategies are aimed at the traders who live by the well known phrase – the trend is your friend. That is, they only get into trades that are in synch with the current trend direction. So, if the trend is going upwards, they will only trade upwards and if the trend is going downwards, they will only trade downwards.

Reversal strategies are the ‘reverse’ of the above. Instead of trading with the trend, the aim is to trade against it. That is, entries are made when traders are predicting that the current trend will change direction and start a new trend. So, if a trend is going upwards, they will only trade downwards and if the trend is going downwards, they will only trade upwards.

The logical thing to do is to choose continuation Forex trading strategies and trade with the majority. However, this is not as simple as it seems. When trends are created they don’t just travel in that direction continuously and they certainly don’t simply move in that direction all the time. They mostly create swings where the trend direction has to ‘take a break’. This ‘break’ is a reversal but it can be very difficult to predict just how big this sudden break/reversal will be. It could simply reverse just a few pips in the opposite direction only to re-continue in its original direction or it could be big enough to take out a stop loss. So, just because a trend is apparent in the market, it does not mean that you can simply trade in its direction. Timing is crucial to generate a good entry here.

For some reason, most traders think that predicting reversals is an impossible task. This is not true. Every trend has an end and reversals appear in the market all the time. It is the traders’ ability to read the market, spot weaknesses in current trends (whether they are large or small) and use this reading to his/her advantage. The fact is that if traders catch a long-term reversal their risk/reward ratio is in favour of reward on a large scale. This is because a reversal usually has a longer way to travel than a current trend that is caught half way through.

With that said, traders should have the ability to trade both continuations and reversals and use them to their advantage. This does not mean that traders should trade a range of different strategies but simply to pick one from each corner and practice them thoroughly throughout Forex training. This way, more opportunities to get into the market will become apparent. If a trader’s personality doesn’t allow the practice of both types of strategies then the best thing to do is to stick to your way of trading and insure you become the master of those strategies in order to increase your success rate.