Here I am going to look at a simple Forex trading tip which is related to trading reversal days which offer you trading signals with the low risk and high reward so let's look at how to trade these moves in more detail.

Reversal Day Definition

The traditional definition of a reversal day in an up trend is when prices open above the previous day's close, make a new high and then moves down to close below the previous day's low. This pattern appears again and again and can be traded for profit. Obviously after a reversal day, you are expecting the price to continue to the downside and not every reversal day will do this so how do you decide which ones to trade?

Increasing the Odds of Success

When the trade set up occurs, you need to check how overbought the market is on the day and you can usually use some momentum indicators to do this and my favourites would be the RSI and the stochastic.

These indicators can be used to see how likely the reversal will continue and you just need to see if there overbought. If they are, the reversal is likely to be a good one. In addition, the bigger the daily range and the higher the volatility, the more powerful the signal is likely to be. You can easily check volatility with another visual indicator - the Bollinger Band.

Finally, when looking at reversal days, I generally like them to come off an event in the news which traders are looking at as it shows that the bullish news has failed to help the market close near a new high which is bearish.

Trading the Move

At the end of the trading day if you like the look of the move, you would go short and put your stop above the high and wait for lower prices to unfold. The next day, you should see a follow through to the downside and when this happens, stops are hit and the down trend accelerates and you make a good profit.

The reversal day is also seen in the "hanging man" Japanese Candlestick charting pattern and the candle is so named, because it resembles a hanging man. Its a very apt name, because those traders who rushed to buy at the top of the market are left hanging and are strangled, as the price moves lower.

Final Words

Trading reversals days in currencies, can be one of the most profitable chart set ups you can trade and if you learn how to do it correctly, it can make you huge Forex profits.