Key Reversal

What is a Key Reversal?

In trading, a Key Reversal is a type of price pattern that can indicate a possible change in the current trend. This pattern can be a powerful signal, especially when it occurs after a long trend.

How Does a Key Reversal Work?

A Key Reversal happens when a security’s price reaches a new high or low for the period, but then closes in the opposite direction. For example, in an uptrend, the price would record a new high, but then close lower than the previous session. Conversely, in a downtrend, the price would hit a new low, but close higher than the prior session.

Understanding Key Reversals

Key Reversals are significant because they tell traders that the momentum of the trend is potentially weakening. It does not necessarily mean the trend will reverse, but it does suggest that the forces of supply and demand are possibly changing. This can give traders an early warning sign to watch for further signals of a possible trend reversal.

Types of Key Reversals

There are two types of Key Reversals: bullish and bearish. A bullish Key Reversal indicates a possible upwards turn in price, while a bearish Key Reversal points to a potential downwards movement. The type of Key Reversal can help traders determine their strategy.

Key Reversals and Trading Strategy

When a trader spots a Key Reversal, they can use it to plan their next move. If it’s a bullish Key Reversal, it might be a good time to consider buying. However, if it’s a bearish Key Reversal, the trader might decide to sell or short sell. Always remember, trading involves risks and one should always make decisions considering those risks.

Conclusion

A Key Reversal can be a useful signal for traders, offering insight into potential shifts in a trend. Like with any trading strategy, understanding and correctly reading Key Reversals requires practice and experience.