Reversal trading is all about spotting and capturing trends once they’ve been exhausted in its trajectory, whether it’s up or down. Though it’s not a very popular form of trading, some investors and traders make most of their money this way, and even a select few investors focus exclusively on reversals.
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This article will shed light on some of the fundamentals of reversal trading so you know what to start looking for and how to effectively begin a strategy.
Fundamentals
In traditional markets, fundamentals can change over time. For example, a company can sell a stock, and there could be a massive demand for a product, a county’s GDP can struggle, etc. There could be a fundamental shift in the market that change people perception of the market. This may not result in an instant trade reversal, but over time, as traders begin to feed their minds with the fundamentals, they begin to think differently on the market, and this could trigger a reversal. Though this fundamental news triggered reversal may be challenging to notice short term, but traders must keep an eye on them.
Cryptocurrencies, however, have different fundamental metrics that are peculiar to them and are not generally moved by fundamentals of traditional markets. One that sums it all up is the Bitcoin price model found on woobull.com.
The model makes use of information from the blockchain, which is illustrated by solid lines and dotted lines for technical data. Below are the ones we find most significant for timing the Bitcoin price following a reversal trading strategy.
Bitcoin Price Model
CVDD by Willy Woo
The Cumulative Value Days Destroyed (CVDD) is an indicator that has historically picked the bottom of the Bitcoin (BTC) market, as shown on the chart above. It shows the passing of Bitcoins from old to new investors; the transaction carries a USD value and also destroys an amount of HODL time by the previous holder.
CVDD is the cumulative sum of this value-time destruction as a ratio to the age of the market and divided by 6 million as a calibration factor.
VWAP PRICE by @icoexplorer
The volume weight average price, in other words, an approximation of what the entire market paid for their coins using market price and on-chain volume.
TOP CAP (experimental) by Willy Woo
It is a measure of the average cap multiplied by 35 that has historically matched market tops.
Technicals
Technical analysis for the crypto market works better when the trade reversal in consideration is long term. Anything that suggests a change in demand and supply, and the price of the currency from the technical perspective. It could be candlestick patterns, double top, triple top, rounding top, divergences, harmonic patterns, etc.—anything that suggests a shift in demand and supply.
In a bear market, we may notice rejection of buying support levels, thereby setting up new resistance levels that the price finds challenging to advance.
In the opposite case of a bullish trend, the price often establishes new support levels after a failure of resistance levels. The goal of the trader is to notice and ride these waves early.
Catalyst from news
Some sudden, surprising news coming out can change the perception of the value of the currency. Suddenly, how people value the cryptocurrency changes—this can lead to a trade reversal.
A typical example is the launch of Bakkt’s physically settled Bitcoin BTC futures where people saw it as an opportunity to short the BTC and perhaps buy back at a lower price. Suddenly people start pulling out and selling.
As a trader, look out for these kinds of news and ride the wave to make the most in trading.
Other factors Affecting trading trend reversals
Market
Different markets exhibit different characteristics. Some markets are prone to reversals more than others. This may be more on than medium-term basis rather than the long-term basis, but often when studying the different charts, some charts are range bar. They run off for a couple of month and reverse back down again.
Some charts will be very trending for multiple years in a row. You don’t want to trade reversal on those multiple-year trends unless there is a significant shift in fundamentals, a significant catalyst, or a vital technical aspect that all lines up.
Be careful though. The chart that exhibits those reversals regularly often means you can be less strict with your criteria. The battle is picking the right market.
Picking the correct strategy
Your strategy answers the question of how to find that opportune trade reversal.
You might be thinking: “to decide on a reversal, I want to see so-and-so kind of technical news, or some kind of a catalyst, or a certain fundamental.” What will trigger a trend reversal? What is my risk-reward trigger and filter?
Your strategy should answer these questions. The biggest thing is you need in reversal trend is… PATIENCE. Don’t be hasty with a trade without picking the right strategy and seeing the right triggers.
Risk to reward ratio
Even if the reward is huge and juicy, do your due diligence and consider the risk you are willing to stake in the trade. The chance at reward must not blind you to the risk that’s involved. Your risk must be sensible and nearly robotic in nature so emotion doesn’t get in the way of smart trading. Instead of staking a considerable amount with your first trade, try staking a smaller portion to see if your strategy is working. Build confidence and do it again.
Disclaimer
Content provided by CryptoTraderNews is for informational purposes only, and should not be construed as legal, tax, investment, financial, or other advice. All information is of a general nature. As always, there is risk with any investment. In exchange for using our products and services, you agree not to hold CryptoTraderNews Pro, its affiliates, or any third party service provider liable for any possible claim for damages arising from decisions you make based on information made available to you through our services.
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