Trading ranges that lead to trend reversals. Large move to the upside and large move to the downside
This lesson will cover the following
- Some ranges may cause a reversal
- A large up move and a large down move – how to interpret such a situation
Trading ranges that lead to trend reversals
Trading ranges, which lead to trend reversals can often be spotted during trending trading range days, because a reversal usually occurs of the final trading range during the final 1-2 hours of the trading day. At times the low extreme during a bear trend day is produced from a small trading range, comprised by large bars, or bars with large wicks. Trading ranges, that lead to reversals, can be considered also as other setups (double bottom pullbacks, for instance).
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On the 5-minute chart of ADS above there was a considerable sell-off, followed by a trading range, comprised by large trend bars and bars with large wicks, which led to a reversal. This setup was a double bottom pullback bottom.
Large move to the upside and large move to the downside
A trading range can sometimes be formed, when the price demonstrates a large move to the upside, followed by a large move to the downside, which corrects almost the entire move upwards. However, it is worth noting that such a scenario may lead to a new trend instead of a trading range. What a trader should look for, in this case, is if a reversal formation appears after the second move ends. If a reversal occurs, it should be enough at least for a scalp. If a reversal is not present, the second move could simply continue to trend, with its first measured target probably being at least twice the height of the first move.
On the 5-minute chart of QQQ above there was a sharp move to the upside, which ended at bar 2 and marked a new daily high. It was followed by a sharp move to the downside. This sequence often implies indecision in the market and is followed by sideways trading. In our case there was a small trading range, then a breakout and another trading range. After the second range was breached, the move to the downside continued to bar 4, but it could not be considered as a measured move of the first one.