What are trend trading reversals and how can you identify them?
One secret is that Candle Stick Charts will NEVER show you any of these signs of a reversal let me explain. . .
In this post I will be discussing the varying symptoms that can "hint" a trade reversal using one key metric that defines these, VOLUME.
Before we begin you must understand that price can reverse for two reasons.
1. Price exhaustion -
Last seller sells / Buyer Buys
2. Trapped Inventory -
Piled in Traders whom become "stuck" on one side of a trade. I will be discussing Price exhaustion in another thread so follow for more to be notified when it is released.
Trapped Inventory - The title speaks for itself, when traders pick one direction and pile in due to varying reasons if that direction of the move does not result in further movement in favor of those participants then the inventory becomes "trapped." This is why one of the most important metrics to track the possibility of trapped participants is Volume.
The tools you can use to measure volume vary and are abundant.
My primary focus is around the:
- DOM (Depth of Market) - For pace of price movement
- Foot Print Charts - Ledger based price inside a candle
- Delta - Difference between Market Buy - Market Sell
The symptoms of a price reversal for trapped inventory require 3 things at minimum.
1. Momentum which can be spotted on the (DOM)
2. Above Average Volume within a consolidated price area, which can be spotted using (Foot Print Charts)
3. Imbalance in price transactions relative to the momentum move, which is show on via (Delta)
These 3 indicators provide me with the ability to spot potential "trapped traders" as price moves aggressively in one direction by visually seeing the tape move in a strong pace (DOM), watching the amount of volume come into the move (Footprint) and seeing the net difference between the net market buying and net selling.
For instance, if there is a momentum move in the downside direction as shown in the illustration above. You can see it early on in the DOM slightly before the move unravels. This begins the "trigger" for the reversal trade idea.
As price begins to unravel you can then spot the consolidated orders come in within a small area in price in this example was 5350-49 as shown within the foot print in the second illustrations. This shows buyers "absorbing" price and sellers getting "stuck." The final symptom of the price reversal is the Delta which is positive net buying shown at the end of the footprint that indicates that as price is moving LOWER there is market BUYING taking place than SELLING. As a bonus is my entry on the DOM after price comes back and reclaims the zone it had previously breached down from giving final confirmation that price is pending a reversal .
