A good signal usually combines a number of qualities:
- Price follows the path of least resistance; therefore a roadmap that forms support or resistance is a good reference for a turning point.
- When the price chart prints a chart pattern, the pattern itself provides plenty of clues. Chart patterns usually fall into 3 categories:
- Continuation
- Reversal
- Both of the above
- A candlestick will usually provide a trigger. Some candlesticks are better than others but they are give a hint of market sentiment at the roadmap.
- Lastly a break of a trendline is good confirmation. Note that there is only a fine line between playing ‘breakout’ versus using a trendline as trade confirmation. With the forex market, traders should always be wary of breakout trades because professional will fade the trade.
Let’s look at the EURJPY chart. This is a monthly chart which gives us an excellent illustration of the concepts involved.
Note that the chart has all of the following elements:
1. Roadmap – Channel meets horizontal resistance; level at resistance proves harder to beat
2. A head and shoulder hints at reversal
3. At the critical right shoulder, an evening star can be seen
4. All of the above come together in a confluence ultimately confirmed with trend line break
All elements of a reversal can be found here
