The stock market moves, sideways, downwards or in an upward direction depending on the market conditions and sentiments of the investors and traders. A trend may continue for many trading sessions but not remain the same and keep changing because there are many factors that affect the stock market movement or price of individual stocks.
When such factors are evident or come into the knowledge of the investors and traders, the current direction of the market might change depending on the positive or negative factor. When the market direction changes, it is called a trend reversal, which means the market index or stock price movement is going to change its track in the coming days.
And identifying such trend reversal could be a crucial point for, you to take the right decision of entering into trade positions. However, identifying the trend reversal is not that easy, especially if you don't have enough knowledge and experience in technical analysis. But there are certain indicators, you can use to identify the reversal of the trend.
Though there are many indicators, that can be used to identify the trend reversal in this article, we are going to talk about only the best and most accurate trend reversal indicator. We will discuss the technical indicators that can be used for trend reversal, how to find or identify them and how to use these indicators in intraday trading or day trading.
What is Trend Reversal in the Stock Market?
Trend Reversal in the stock marketis simply a process of change in the direction of the market index or individual stock price movement. The change in the direction can be upside or downside, but when the current trend gets reversed and a new trend starts, and continues for a few trading sessions, then it is called a trend reversal in the stock market.
Usually, when the trend reversal takes place, traders enter into the trade positions. If the uptrend starts from the previous downtrend, you can enter into the long position, while when the uptrend reverses and the downtrend starts, you can go for short-selling. Trend reversal is the turning point that you can use for trading. So, let's find out the best trend reversal indicators that you can use to spot such turning points timely and take advantage of the trading.
Best Trend Reversal Indicators
Trend reversal indicators are the technical tools that you can use to identify the change in the current trend. The indicators follow the price movement of stock or market index and give the indication of whether the price movement is heading towards. And when there is a reversal in the trend, these technical indicators can spot them at the initial stage.
If you can interpret these indications given by these indicators, you can enter into the trade position as per the reversed new trend to take advantage of further movement of the trend and make your trade position a profitable decision.
Though, there are various technical indicators that can give the trend reversal indication, few of them can give a false signal. Hence, using the best one that can give an accurate indication at a very early stage gives you a better opportunity to make your trade position profitable. So, we will discuss only the most accurate reversal indicator.
10 Most Accurate Trend Reversal Indicators:
#1 Moving Averages for Trend Reversal
Moving Averages (MA)are one the most useful technical indicators you can use for the trend reversal. Moving average lines such as, simple, exponential, weighted and volume-weighted show the trend in the stock price or market index movement. The moving average lines also show the support and resistance levels that levels also work as the trend reversal signal.
To use the Moving Averages for the trend reversal, apply the type of moving average you prefer and then keep watching the price movement, when the price moves below the moving average a bullish trend reversal is confirmed. On the other hand, if the price moves above the moving average, a bearish trend reversal is confirmed in the stock.
Apart from that you can also use the combination of short-period and long-period moving averages to know the trend reversal. For example, if the 50-day MA crosses below the 200-day MA, it indicates that the uptrend is over, and a downtrend is likely to start. While, if the 50-day MA crosses above the 200-day MA, it signals the reversal of the downtrend.
#2 RSI for Trend Reversal
RSI or Relative Strength Index is another useful and one of the best trend reversal indicators you can use. , RSI usually measures the magnitude of recent price changes and gives the indication that the stock price or market index is trading in the overbought or oversold zone.
In other words, you can say when the price is below 30, it is in a bearish trend, while when the pricing moves above 70, and it is trading in a bullish trend. And when the RSI is hovering around 40 or 50, it means there is a trend reversal likely to occur in the stock.
You can use the 30 and 70 in the RSI, as the oversold and overbought levels, but it can go to peak levels up to 90 and 10 indicating the possibility of trend reversal. The RSI divergence happens when the RSI indicator and price move in opposite directions. This divergence indicates there is a potential reversal in the current trend, and the new trend may start.
#3 Bollinger Bands for Trend Reversal
Driven from moving averages and standard deviation, Bollinger Bands is another useful technical indicator that you can use for the trend reversal. In Bollinger Bands, there are three lines, the middle line is the moving average and the other two outer lines represent the standard deviation of the underlying stock or market index.
Bollinger Bands are already a trend indicator and you can use this for trend reversal when the price fluctuates between the three lines (bands). Yes, when the price remains between or along the lower lines of the bands, there is a bearish trend. While, when the price remains between the middle and upper lines of the Bollinger Bands, a bullish trend is confirmed.
Bollinger Bands is effective and works well in a volatile market. The trend reversal usually occurs when the price moves below the middle line. But don’t rely on this indicator individually, instead use other indicators to confirm the reversal in the trend.
#4 Stochastic Oscillators for Trend Reversal
Though, the Stochastic Oscillator is one of the most useful tools generally used to know the overbought and oversold levels in the stock price. %K and %D are the two important lines you can see at the bottom of the TradingView Chart that are also characterized by overbought and oversold levels.
Stochastic Oscillator is especially known for following the momentum or speed of the price movement. However, for trend reversal, you can use it by interpreting the bullish and bearish divergences. If the Oscillator moves to overbought and oversold levels and divergences occur, then there is a chance of trend reversal in the price.
#5 MACD for Trend Reversal
As the name represents, MACD or Moving Average Convergence and Divergence is developed from two moving averages. It is a kind of oscillator, when applied on the candlestick charts, it is visible at the lower panel of the chart like when you add MACD in TradingView. You can use the MACD to know the current trend and also for the trend reversal.
In MACD, a trend reversal occurs, when there is a crossover between the two moving averages. And when the MACD line and the signal line often precede, there is the possibility of a trend reversal. A Bullish crossover happens, when the MACD line crosses above the signal line, while bearish crossovers occur when the MACD line crosses below the signal line.
The confirmation of the trend occurs when the two lines maintain a bearish trend and you can get a clear picture when the indicator moves below the neutral line.
#6 Fibonacci Retracement Levels
Fibonacci Retracement Levels can be another useful technical indicator that you can use for the trend reversal. Fib Retracement shows the retracement of the price from the last rally or big move in the price like uptrend or downtrend. The percentage ratios (i.e. 23.6%, 38.2%, 50%, 61.8%&78.6%) can be used as the crucial point for the trend reversal in price.
The Fib Retracement Levels in the TradingView are the lines that show the ratios in a horizontal position. These lines, with regards to the percentage levels in the Fib Retracement, indicate the occurrence of the support and resistance levels. While the percentage shows the retracement or fluctuation of price from the last move.
#7 Donchian Channels for Trend Reversal
Donchian Channels is a similar indicator to Bollinger Bands that you can use for the trend reversal. However, both the indicators are usually created differently, as Donchian Channels is pretended a moving average and the highest and lowest levels in a period. While Bollinger Bands are combination of a moving average and standard deviations.
In Donchian channels, the upper and lower lines are considered the highest and lowest points in that period that you can use for trend reversals. A bullish reversal is then confirmed when the price goes above the middle line of the Donchian channels. A bearish reversal is confirmed when the price or market index moves below the middle line.
#8 Support &Resistance for Trend Reversal
Support and Resistance levels of the stock price or market index movement also work well for trend reversal, especially where there is breakout or breakdown signals are visible. Normally, you can use the support levels to create long positions and resistance levels are the best points for short-selling. But when these levels break, a reversal in trend occurs.
To confirm the trend reversal at support or resistance levels, make sure to keep watching the volume levels, if there is a huge volume surge and the price is likely to break out from the accumulation stage, your long positions will become profitable. At these crucial levels, you can also use other indicators to confirm the trend and possibility of reversal.
#9 Trend Reversal Candlestick Chart Patterns
Apart from the technical indicators you can also use the Candlestick Chart Patterns for finding out the trend reversal. Head & shoulders and Double tops patterns are the two reversal patterns that can help you in identifying the possible reversals in trend.
Head and shoulders patterns are usually formed at the end of an uptrend with a reversal aspect, hence, can work as one the best trend reversal patterns for traders. This pattern is formed with three highs during an uptrend or three lows during a downtrend that forms a left shoulder, right shoulder, and head. You can use both shoulders and head for the reversal of the trend and on the basis of these patterns you can into the right trade position.
While double tops pattern is formed at the end of an uptrend creating an "M" shape pattern and that is formed when the price reaches the previous resistance level. This could be the potential trend reversal point, as breaking this resistance is not easy for the price. To confirm the double top pattern, check if the support is broken and indicates a reversal from it. When the neckline breaks, the downtrend is likely to further continue in the stock or market index.
#10 Volume Indicators for Trend Reversal
The volume bar and indicators, are also some of the most accurate reversal indicators you can use as a confirmation tool. However, they are not directly related to the price action and can give early signals that might be not reliable. But can give you a chance to enter into the market by indicating the change in the trend. Volume Extremes, Volume Oscillator and On Balance Volume are some useful indicators you can use for the trend reversal.
A sudden and extreme change in daily volume is simply an early sign that the trend might have run its course. When the price moves upwards with sudden extremely high volume, means there is huge buying in the stock or underlying asset. This is called “Climate buying” and when all the buyers have bought and no more buyers are left in the market, then the trend will change. Similarly, when price falls with the surge in huge volume, climate volume absorbs all the sellers and when there are no more sellers left, then the downtrend is likely to be reversed into the uptrend.
On the other hand, interpreting the Volume Oscillator, positive values do not exactly indicate that trend bullish prices are supported. It means the trend is likely to continue in the same direction. While when the negative values, show that the trend is weak.
Balance Volume (OBV) is a cumulative indicator, and when both price and OBV are rising, the bullish trend is confirmed. Once the (OBV) starts weakening, it might be heading towards a trend reversal. Hence, you watch the NBV with a long-term moving average of its value that will give a clearer picture of the trend of the OBV that is more important.
Best Technical Indicator for Trend Reversal
However, all the above-discussed indicators can be used for trend reversal. But Moving Averages, MACD, RSI, Bollinger Bands and Oscillators can be the best technical indicators for trend reversal. However, there are various factors that work when the current trend in the market is going to be reversed and not only the technical indicators you can use other parameters.
Volume plays of a very important role in pushing the price from the current trading zone or sideways range trading to an uptrend or downtrend. Candlestick chart patterns can also tell you the possibility of a change in trend, hence here you need to precisely identify where and when the trend is likely to reverse. Once you see such indications you can use other indicators to confirm the trend reversal possibly and according to that create the trade position.
How to Identify a Trend Reversal?
Identifying the trend reversal is one of the most crucial tasks; you need to perform while considering the various factors that affect the stock market in India. Here you need to consider the fundamental analysis and technical analysis to understand the economic scenario and stock market cycle. A combination of all such factors can be responsible for trend reversal.
From the fundamental point of view, when the economy is running into recession or at a contraction phase you can see there is a bearish trend in the market. While, when the economy is booming and growing at encouraging rates, the stock market also runs into the bullish phase. And when there is a turnaround in such phases, you can see the trend reversal.
Similarly, from the technical analysis point of view, if the market has moved up with a big rally, and is now likely to consolidate you can use the technical indicators like Fib retracement and other tools to identify where the market will start correcting. Moreover, you can find out the trend reversals using support & resistance, breakout and pullbacks formed on the chart.
How to Find Trend Reversal in Intraday?
To identify the trend reversal in intraday, you can use various techniques like analyzing the volume. When you see there is a significant spike in trading volume with price movement it could be potentially a trend reversal in the market or stock price movement.
You can also read the candlestick chart patterns for 15 to 10 minutes to identify the trend reversal patterns like double-tops or head and shoulder etc. On the other hand, Moving averages, RSI, Support and Resistance can be the best trend reversal indicators for intraday you can use them individually or in combination with multiple indicators.
Trend reversal in the stock market is simply the point from where the current trend ends and the new trend starts. It can help you to enter into a trade position, like buying or selling the stocks or booking the profit from the existing trade positions. There are various indicators that you can use to identify the trend reversal in the market or stock price.
RSI, MACD, Bollinger Band and Fib Retracement or Support and Resistance are the technical indicators that you can use to identify the trend reversal from the intraday or short-term trading point of view. Apart from these technical indicators, you can also use the volume charts and candlestick chart patterns in TradingView to spot the changes in the trend.
Nevertheless, identifying the trend reversal in the stock market is as much as you think. You should have deep knowledge and skills in technical analysis like setting up the charts in TradingView, understanding the chart structure in TradingView, and adding or removing indicators in TradingView. To perform the technical analysis you also need the right online trading platform that can provide you with all these technical tools, techniques functions and market data.
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