"I'll turn this car around!"
As you learned in the Continuation Patterns lesson, road trips are some of our favorite vacations. You jump in the car, head out on the open highway and soak in all of the scenery that you miss when you fly somewhere.
Unfortunately, every road trip has to come to an end at some point, and you have to turn around and drive back home. Sometimes you turn straight around and head back immediately, but sometimes you delay heading home for just a little bit as you cruise around a little longer. But either way, you end up turning around.
Currency pairs turn around and end their road trips too. They run into support or resistance levels and eventually turn around and start moving back in the opposite direction. Sometimes they turn around immediately, and sometimes they test the support or resistance level in front of them a few times before finally giving up and turning around. Regardless, they eventually end up turning around.
If the currency pair really is at the end of its road trip and is ready to turn around and head home, a reversal pattern will form while the currency pair consolidates. Reversal patterns tell you that the currency pair is going to turn around and reverse its previous trend after it breaks out of the continuation pattern.
Identifying Reversal Patterns
Reversal patterns, like all price patterns, are made of the following four pieces:
Old trend: the trend that the currency pair is in as it starts to form the price pattern
Consolidation zone: a constrained area defined by set support and resistance levels
Breakout point: the point at which the currency pair breaks out of the consolidation zone
New trend: a reversal of the old trend that the currency pair enters as it comes out of the consolidation zone
Forex Essentials Course - 21 lessons:
1. What is the forex2. Supply and Demand
3. How Trading Works - Interbank and the Forex
4. Choosing a Dealer
5. Forex Pairs - Characteristics and Qualities
6. Earning Interest in the Forex
7. Margin and Leverage
8. Short Term vs. Long Term Trading
9. Forex Futures vs. Spot Forex Accounts
10. Fundamental Analysis in the Forex
11. The Calendar and Economic News
12. Introduction to Charting and Technical Analysis
13. Support and Resistance
14. Fibonacci Analysis
15. Price Patterns
16. Continuation Patterns
17. Reversal Patterns
18. Technical Indicators
19. Portfolio management – Diversification
20. Portfolio Management - Position Sizing and Stop Losses
21. Introduction for Forex Options
