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How to Trade by Psychological Reversal Strategy

Certain traders decide not to use indicators in their strategy because they feel they are falling behind. Such traders believe that all they need for market analysis is price charts.

The price contains all the necessary parameters and factors and represents the behavior of the masses and the main players. You just need to learn to read and understand graphs. Also, some investors consider the fact that the indicator is based on price parameters as another disadvantage.

The commercial practice called Psychological Reversal assumes that no indicators are used. It is based on understanding the psychology and behavior of a group of traders. This may seem similar to the False Breakaway technique, but the Psychological Reversal strategy has a strict time limit for entering the market.

This article explains how to correctly interpret the behavior of market participants in times of strong moves and how to manage risk through strategies.

What is a psychological reversal strategy?

Traders work on hourly charts. The idea is to look for a strong break of the level and the expectation of a quick price reversal. For example, when the market is in an uptrend, the price breaks the next resistance level with a large candlestick and returns immediately – this is a sell signal.

Some think that most market participants place protection orders behind local extremes, hoping for a market reversal soon. As soon as the price reaches this order, a movement in the opposite direction occurs; The trader loses, and then the market actually turns downwards.

As mentioned above, the Psychological Reversal strategy does not require indicators. However, experience is the key to finding important levels quickly and clearly and assessing the speed of price returns – whether opening a position is enough.

Not using indicators means different traders can set levels differently. Traders call work without indicators an art, and its quality depends entirely on the experience of the investor.

How to buy through a psychological reversal

The author of the strategy proposes several rules for opening such trades.

1. The trend must be down. However, the price is enough to make a new low below the previous price and a new high below the previous price several times.
2. The hourly candle broke the previous low. This should be a very clear area where the price has bounced.
3. After the break down, the price should return to this level within 1-2 hours, which will be a signal for the correction of the bearish trend.
4. Purchases can be made at the lowest price where the price has been broken.
5. Take Profit is placed at the distance from the level to the lowest of the breakaway down. Positions cannot be moved for the next 24 hours.
6. The author does not specify how to place a stop loss, but working without it becomes too dangerous. So there are two ways to place a stop loss.

The first is to place SL below the lowest price that has broken away. In this case, it is slightly larger than the take profit. The second option is to place the SL below the low that is currently expected to break. For example 10-15 points below depending on the size of the take profit. In this case, of course, there is a higher risk that the SL will be triggered during the correction.