Hello to everyone! I was able to attend the 5th Season of Crypto Academy, albeit late, and I can say that I miss producing content. Let's continue to work for the development of this community.
In this assignment, I will talk about how to understand when the trend formations, which are the building blocks of the market, end and how we can turn the situation in our favor in bullish or bearish situations. I wish you pleasant reading.
a) Explain your Understanding of Trend Reversal. What is the benefit of identifying reversal patterns in the Market?
b) How can a fake reversal signal be avoided in the market? (Screenshot needed).Give a detailed explanation on the following Trend reversal identification and back up your explanation using the original chart. Do this for both bullish and bearish trends (Screenshots required).
a) Break of market structure.
b) Break of Trendline.
c) Divergence
d) Double top and Double bottomPlace a demo trade using any crypto trading platform and enter a buy or sell position using any of the above mentioned trend reversal/continuation pattern.
Crypto assets, FX exchanges and etc. in finance types, prices continue to progress, sometimes in a definite and sometimes indeterminate manner. Markets where the direction of the price is uncertain prevents traders from investing because a smart investor would never want to invest their money without knowing the direction of the market. In markets where the price is predictable, there is a certain trend. This trend is apt to attract investors, as it allows us to predict where it will go, be it up or down.
Just because an asset is in a downtrend doesn't mean it will go down forever. Likewise, if the price of an asset is constantly on the rise, there will of course be a time when it will fall. Therefore, an asset with a bearish or uptrend would be more attractive rather than an unclear market.
Trend formations are one of the most important clues given to the trader about the direction of the market. If an asset continues to rise by making certain corrections, this is a healthy rise, we can also talk about this tactic for decline. For a solid uptrend, the price should not fall below the previous low while correcting after breaking the previous high. Likewise, an asset in a downtrend should advance by making a lower low than the previous low, while it should not see a price movement higher than the previous low during its correction. This two-way trend formation offers traders the opportunity to buy and sell. So how do we know that we have come to the end of these trends and that the price will start to move in the opposite direction?
We talked about how trend formation is formed. Next, let's talk about the situation in which these formations are reversed.
In the chart drawing we saw above, we can clearly see that the price is in an uptrend. The price is constantly breaking through the previous high and the corrections are always above the previous high low. These are called Higher Highs (HH) and Higher Lows (HL) for short. Then, the asset in this uptrend breaks the previous HH level and makes another HL again. However, as the price reaches the saturation point, the asset cannot rise any further and makes a High below the previous HH level. The movement of the price here is the first clue that indicates the end of this trend.
The second clue that the trend might reverse is when the price tests the previous HL level and breaks down. This is the region that I have shown with the circle. Buyers no longer have the appetite to raise the price and it's up to the sellers. The price's LL is a sign for us that we have come to the end of the trend, and now the only thing left to do is to exit the trade on the asset retest.
We can show the same example for an asset in a downtrend. Let's say you have a sell-side position and you want to exit the trade in the most profitable place possible. As you can see, the price moves forward by making LH and LL, but after a while it cannot make a new LL. It rises above the previous LH level where I indicated with the circle. This sign shows us that the trend is over.
- So what gains does noticing these reversal signals bring to the trader?
1. An investor trades with a risk-reward system and wants to get the maximum profit he can get from an asset. Therefore, the sooner he realizes that the trend is reversing, the faster he will leave the trade and the more profit he can make.
2. If the trader does not realize that the trend is reversing, he may face big losses. This causes him to miss the next actions or even to be completely out of the game.
3. An investor who follows the trend reverses will have the necessary signals to take the most correct position in the direction of buying or selling. If an uptrend asset has a trend reversal, the trader takes a sell position, and if a downtrend asset has a downtrend, the trader takes a buy position. This will allow him to earn good profits.
As you know, alt coins have both USD and Bitcoin parities. Therefore, an altcoin in an uptrend can be hit hard by the Bitcoin drop.
In the above SOL/USDT pair, price breaks the last HL level and seeks liquidity. Despite failing to break the previous HH level in the next price action, the price continues to rise again from the old HL level. Under normal circumstances, we expect the trend to reverse while this situation is experienced. However, this situation can mislead us as it occurs with the fall of Bitcoin.
As you can see, Bitcoin is falling by about 9% as it is rejected from the resistance zone in a short time frame, and this causes the structure of alt coins to deteriorate. That's why tracking Bitcoin can help to spot fake reversal.
It is possible to detect false return signals by using some indicators as well as knowledge. I avoid using too many indicators during my trades because it causes me to miss the points I want to see while searching for different signals. Therefore, it is possible to detect fake reversal signals with the RSI indicator that I use the most. Now let's explain with a small example.
On the EOS/USDT chart above, we see that the asset is in an uptrend. However, the price is not able to rise further and a downward break occurs from the last HL level. Now I am checking the RSI indicator to see if this breakout has reversed the trend. While the price is at the same levels, the RSI indicator signals negative divergence. So I can understand that this market disruption is real. In the continuation, we can see that the price has entered a downtrend.
a) Break of market structure.
b) Break of Trendline.
c) Divergence
d) Double top and Double bottom
a) Break of market structure.
In money markets, the price moves within certain rules. These price movements allow traders to anticipate future price action and take either buy or sell trades. The trader uses his knowledge of fundamental and technical analysis and aims to make a profit with his knowledge. Therefore, it is the primary duty of the trader to understand the market structure well. Because trading in obscurity causes the investor to lose money.
We see the price move up and down. These rises and falls form market structures. The price, which continues in the upward direction, continues on its way after making the necessary corrections. This asset is in an uptrend unless it remains below the previous low after breaking its previous high. Likewise, if an asset in a downtrend makes lower lows without breaking the previous high, it means that the downtrend continues. However, since these rises and falls will not continue forever, the ongoing market structure will deteriorate. In order to be a successful trader, it is necessary to notice these distortions and trade accordingly. Now let's exemplify the deterioration of both the rising market structure and the break of market structure.
In the chart above, we see the ETH/USDT pair in a downtrend. The price, which progresses by making LH and LL, becomes unable to dip further after a while and an upward breakdown occurs. With the breaking of the last LH zone, the price starts a new trend and thus the break of market structure is broken. Buyers replace sellers.
In this chart, we see the uptrend of the VET/USDT pair. Price moves forward making HH and HL and the uptrend continues. However, when the price reaches the saturation point, it cannot break the last High level and continue its rise. While this movement of the price indicates that the buyers are decreasing, the market structure is deteriorating with the breaking of the last Low level. We can easily see that the price in the uptrend has now reversed. With the retest to the last Low level, the price starts its downward movement.
b) Break of Trendline.
Trend lines are an important tool that helps us predict the future movement of the price. We can understand that a trend is solid by continuing its direction without violating the trend line in retracements. If we observe an uptrend, we wait for the price to rise above the last High without breaking the trend line. Likewise, if we are looking for a downtrend, it is expected that the price will go below the last Low level without breaking the trend line. Usually, a trend with 3 taps is a solid trend. A breakout of this solid trend reversal could be another sign that the price has reached the saturation point. Let's better understand this situation on a few graphs.
In the ETH/USDT pair we saw above, the price in the uptrend touches the trend line every time and continues to rise. This solid rise continues by breaking the previous High levels. But on the next attempt at the trendline, the price breaks the line, retests and ends up as it cannot re-enter the trend. In other words, the uptrend ends and the downtrend begins.
In another chart, we see the downtrend in the LINK/USDT pair. The price that tries to break the trend several times fails and continues to decline. In his last attempt, he manages to break the trend line, and after breaking the last LH level, he retests and starts a new trend. With the breaking of this trend, buyers take the place of sellers.
c) Divergence
Divergences are one of the tools used in money markets to help us predict the direction of the price. To detect a divergence we need to use some indicators. The most used is of course the RSI indicator. The divergences that we can use both in the buying and selling direction are the tools that enable us to maximize the profit obtained and to exit the position at the right place. Sometimes, we can open a position in the direction of buyer or seller from the right place by using divergences.
The most important rule to notice divergences using the RSI indicator is the following. If the price continues to rise but there is negative divergence on the RSI indicator, this indicates that the uptrend is a fake. On the contrary, if the RSI indicator gives a positive divergence signal while the price continues to go lower, this signals that the price can move in the opposite direction at any time. Let us illustrate this with a few examples.
The price moving forward by making LL in the above AVAX/USDT pair continues in a downtrend. But when we look at the RSI indicator, although the price makes new Lows, the RSI signal starts to HL instead of making new lows. The help we received here tells us that the price may move in the opposite direction and we should look for a buy position.
(PS: Indicators never give 100% accurate signals. We should use these indicators as an auxiliary tool.)
The price continues its upward trend by doing HH in the above DOT/USDT pair. To apply what we have learned, we look at the RSI indicator and check if this uptrend is healthy. The RSI indicator does not say the same thing when the price is making higher tops. There is a negative divergence here. Price encounters selling from the last High level and enters a downtrend. A smart trader will start looking for a sell position after receiving this signal.
(PS: Indicators never give 100% accurate signals. We should use these indicators as an auxiliary tool.)
d) Double top and Double bottom
There are some structures that indicate a reversal of the ongoing price action and the market. This double top and double bottom are examples of these. Now, let's try to understand these two structures by talking about their features and giving examples.
Double top formations are generally a structure formation that indicates that the rising market has ended its rise or at least has evolved into a falling market for a while. As you know, for a rising market to continue its rise, the price must break the previous High level. This structure indicates that the buyers are no longer able to raise the price with the failure of the previous High level to be broken and the sellers assume a more dominant role.
The most important factor to be able to talk about a double top formation will be not to see a pricing above the last High level.
In the above AVAX/USDT pair, the price, which has reached the end of the uptrend, forms a double top formation and starts a downtrend.
Double bottom formations are structures formed at the end of a downtrend and are seen when the price is now ready for a new uptrend. In these structures, the price does not fall below the previous low and that area acts as a support. The most important rule in these structures, where we have to take a position in the direction of the buyer, is that the price does not fall below the previous Low level or close.
The price coming to the end of the downtrend in the above XRP/USDT pair retests the same zone days later and starts a bullish wave without violating the double bottom rule. In this way, the downtrend ends and the uptrend begins.
Today's market drop was very sharp. Most coins have the same price action. When I examine the SRM coin, which is one of those affected by the sharp decline, I can say that the price broke the previous LH level and I saw a break of market structure here. That's why I ordered long at 4.212 level. My Stop Loss level is 4.174, just below the previous green candle. My take profit level is 4.296, which I think will get a reaction. The position is currently profitable. But I can also make an earlier exit by examining Bitcoin.
In this assignment, I talked about trend reversals, how market structures deteriorated, how we can make profitable trades by examining different formations and illustrated them with graphics. The issue of break of market structure, which is one of the important factors of Price Action, was a subject that interested me closely. That's why I was both more informed and enjoyed while doing it. Knowing these structures that allow us to predict the direction of the price should be among the sine qua non of any successful trader. I had the opportunity to consolidate some formations that changed trend reversals, market structures and market structure. Finally, I closed the transaction I opened profitably.
Thank you for reading.
CC: @reminiscence01
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