This forex reversal trading system is what many of the most profitable forex traders use. You will learn how to spot when the price is going to reverse and profit from that.
We are not going to use any indicators. You may ask why not? Because every indicator lags. They use past data and present you with old information. What we need to know is what price is doing right now. That is why we trade pure forex price action in this forex reversal trading system.
We don’t need a chart like in the picture below.
We want something like this. Easy to read and clear to understand forex chart.
Support and resistance areas
First step is to place support and resistance areas on your chart. It’s also one of the most important skills of a good forex trader. And I will teach you how to do it.
If you don’t know what they are then you can read more here. These areas are where we are going to look out for possible signals to buy or sell. When price hits these areas it is likely to stall or reverse completely.
We want to enter long trades (buy) on support (green line). This is an area where a bunch of buyers is waiting to push the price up and we want to ride with them. Buyers are also called Bulls in forex slang.
As you have probably guessed, resistance (green line) is where we want to enter short trades (sell). There are sellers waiting to push the price down. Sellers are called Bears in forex slang.
The main point here is that when we reach support – we look to buy and when we reach resistance – we look to sell.
How to place support and resistance
Now let’s break down how to place support and resistance. First let’s have a look at a clean chart. Notice that there is like an invisible wall which is pushing price back down.
I have drawn white circles around the bounces.
Now we draw a line that connects these bounce points. And there you have it. Our first resistance line! I use a green line, but this is just my preference.
As you can see the candlesticks don’t bounce off the line perfectly. And they don’t have to. Think about it as a resistance area, not just a line, something similar like in the picture below.
Also there doesn’t have to be 3 bounces, but the more the merrier. I place support and resistance when there is minimum 2 bounces. Also remember that more recent bounces are more important.
Usually I draw my areas on the daily chart, but you can use the exact same technique on every timeframe.
Some examples below.
Remember that you can’t draw a line for every 2 bounces – just use the most strong ones as you can see on my examples.
Indecision Candlestick Patterns
Now we know when to start looking to buy or sell, but we don’t know yet when to enter trades. We should enter trades when the indecision candle closes on the support and resistance area. But what exactly is indecision candle? If you are new to forex trading and want to learn the basics of candlestick patterns then go here first.
There are many indecision candlesticks like a hammer, shooting star, doji, spinning top, etc. We are not going to remember them all. To be frank, even I don’t know them. And to trade this forex reversal trading system successfully we don’t have to. But we must understand what makes an indecision candle and what it is telling us.
Indecision quite literally means indecision. Neither buyer nor sellers are in control of the price.
Take a look at this candle below.
This is a perfect indecision candle. Long upper wick tells us that buyers managed to push up, but then lost control and were bushed back down. A small body also tells us that price has not moved significantly either up or down. Hence the direction of the price is undecided.
Below some random different candles which tell us that there is indecision. They all have some common characteristics – small or no body. Long wick means that price was strongly pushed back. Small wick means little movement. Learn to understand these characteristics and not exact candlestick patterns.
Forex Reversal Trading System Setups
Okay now we can place support and resistance areas on our charts and also spot indecision candles. Now let’s put this all together so we can look for real trade setups.
The idea is that if price reaches support/resistance area and forms an indecision candle, then there is a good chanche that price will reverse. We will then enter a trade and profit.
I enter trades on 4H, 6H, 8H, 12H and Daily charts. I also trade all pairs that don’t have ridicilous spread. This forex reversal trading system works on all currency pairs.
When we see a favorable indecision candle close, then we place our pending order. Because we trade higher timeframes (4H+) then we have plenty of time to do that. Put the entry and stop loss some 2-3 pips away from the candle.
Risk to Reward
The minimum risk to reward ratio I want to get is 1.5:1. This means if we put our take profit 150 pips then stop loss should be 100 pips. Also, we want to make sure that there is no “barrier” on the way to our take profit target. By barrier, I mean support and resistance area. Below is an example where I would not enter a trade, because there is a support area on the way to my profit target. Keep in mind that we want the way to target be clear and when possible then put your stop loss behind a “barrier”.
I use the TradingView charting platform and there is a very useful tool to measure risk to reward. You can use it totally free. As you can see from the picture below – the green area is take profit target area and the red area is stop loss. Nice 1.5:1 RR.
Well that’s it. Simple and easy to understand forex reversal trading system. You can find this system in action on our Forex Blog. Good luck and many pips to us all 🙂
If you have questions then post them below. Thanks.