Picking A Strategy: Trends and Reversals

Downtrends and Uptrends

Simply put, an uptrend is a series of higher highs and higher lows.  A downtrend is a series of lower highs and lower lows.   Structural examples can be seen in the graphics below:

Spread betters use these trends to identify the dominant price direction that is seen in an asset.  When prices are in an uptrend, you know that the majority of the market is bullish on an asset (or bearish in a downtrend).    This is valuable information because you will be able to choose whether or not you want to side with the majority when you are establishing your positions.  The main benefit with this type of approach is the fact that most of the price momentum will be on your side.  This can help to turn the odds for success into your favor because there are fewer antagonistic pressures working against your position. 

Spotting Reversals

Trading with the trend can be a great way to establish low-risk positions in spread betting.  But no trend can last forever and there are real opportunities to be had when spread betters are able to accurately identify situations where a trend is ready to reverse.  These reversals truly mark the best areas to ‘buy low and sell high’ because most of the market is still trading in the wrong direction.

Spotting reversals is easier said than done, however.  Specifically, spread betters need to find situations where the rules for a trend become violated.  For uptrends, this would mean that the asset is no longer posting higher lows and higher highs.  For downtrends, this would mean that the asset is no longer posting lower lows and lower highs. 

In the chart above, we can see an example of a USD/JPY uptrend reversal scenario.  Spread betters could see that the uptrend is ending once the rising trend line is broken.  Here, the rules for an uptrend would be violated because the asset is no longer posting higher lows.  Traders could use a scenario like this as a basis for short selling positions.  Of course, a broken downtrend would lead to the opposite conclusion -- and long positions could then be initiated. 

Adding Indicators

Adding an indicator can help you to confirm whether or not a trend break is valid.  In the chart below, we can see another example of an uptrend that is reversing:

Short sellers might be ready to enter the market once the series of higher highs and lows is ending.  But when we add an indicator reading, it becomes easier to turn the odds for success in our favor.  In this example, the MACD indicator is falling into negative territory just as the uptrend line is being violated.  This suggests that market momentum is truly shifting as we now have the initial evidence seen in the price action, and the added validation of an objective indicator like the MACD.  When we see a confluence of events that point in a similar direction, it makes it much easier to pull the trigger on a new position.  Additionally, cases like these can make it easier to increase leverage on the trade as it will be coming with a greater probability for accuracy. 

Conclusion -- Watch For Trends And Reversals For New Opportunities

It can become easy to use the same strategy for all of your spread betting positions.  But there are different scenarios that will allow you to spot new opportunities, define trading parameters (stop losses and profit targets), and side with or against the majority of the market in your trading stance.  Trading with a trend will allow you to capitalize on the majorty momentum that is present in the market.  Trading reversals involves more risk but will give you a better opportunity to buy low and sell high.