There are hundreds of reversal indicators and each of them works according to its own principle. I will not analyze examples in detail, I will only describe groups of such indicators in general terms:
Oscillators. Reversal indicators that identify overbought and oversold zones. If the oscillator is in the overbought zone, it reverses and prepares to exit it, then we can talk about a potential change in the direction of the current trend.
It is important that the indicator exits the zone as close as possible to a 90° angle with respect to the horizontal border of the zone. Examples: Stochastic, RSI, DeMarker.
Channel indicators. In theory, the price aims to reach its equilibrium value, i.e. the state of balance between supply and demand. When it moves away from its average value, the balance is violated, but sooner or later, the price comes back again.
The amplitude of price fluctuations forms a channel, and most often reversals occur at the borders of this channel. Examples of such indicators: Bollinger Bands, Donchian Channel.
Classic simple indicators with different periods. Most often, moving averages (simple, exponential), stochastics, etc. are used.
Determining the pivot point is basically waiting for the moment when all the lines converge together, after which the trend will reverse and the indicators will diverge.
Examples of such strategies with Stochastics (Spud’s thread), MA, Alligator, and Anti-Alligator are described in this review.
Remember that indicators are just algorithms built on a particular mathematical formula.
They have many shortcomings: they lag and do not take into account the fast-changing character of the market situation, i.e. the illogical actions of big capital owners.
They are constantly improved, various smoothing models are used, but this does not significantly affect the signal performance.
Therefore, be careful when relying on the signals of reversal indicators: double-check them on other timeframes, compare with the data of other tools.
It goes without saying that it is really nice to use indicators during the market analysis, however, the vast majority of newbies tend to overexaggerate their role in decision making process. I mean that all the indicators have tendency to give wrong signals, which can lead to the losses and failures. So, first of all, if you made up your mind to use indicators in your trading, make sure that you don't use only one single indicator. There should be several indicators simultaneously in order to eliminate the wrong signals and increase profits. More than that, you should pay more attention to the prices themselves and the way they behave. Some traders don't notice the prices at all as their attention is concentrated on the indicators. That is a mistake as the price chart itself can tell you a lot of things and provide you with lots of insights.
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