It’s no secret that many rookies who are just starting to learn Forex trading prefer trend trading to reversal trading. So do lots of inexperienced or risk-averse traders. The reasons are obvious: following a trend seems a lot safer and a good deal more stable than betting on a reversal as a support or resistance level nears. But are they really best seen as mutually exclusive alternatives? With the right Forex trading strategies in place, it may be beneficial to do both.
Risk may be lower with trend trading, but so are profits – much lower, in fact, than those that can be gained through reversal trading. Trend traders, especially if they’re nervous newbies, like to take small bites at the market, trading in a currency pair’s prevailing direction (that’s the definition of a trend, isn’t it?).
They have good reasons for their preferred trading option: trend set-ups have momentum on their side and a higher probability of working out as projected. Because trends last longer than reversals, set-ups arrive more frequently too (reversal set-ups are more intermittent, arising only when the price reaches major resistance or support).
Reversal trading undoubtedly involves more risk. But, provided that it’s calculated risk, it doesn’t have to be seen as reckless. When reversal trades work out, they yield much bigger wins than trend trades. Favourable leaps of 10, 20, or even 30 per cent and above are not uncommon. Trend traders rarely, if ever, see wins of this magnitude.
All of which suggests that reversal trading may complement your trend trading. If you apply your usual disciplined rules for trading and entry, then it may be well worth the effort to trade when you next see a potential reversal opportunity coming your way.
Reversal trading requires courage and resolve, but if you’ve studied the charts to spot when set-ups arise, and you adhere to all your disciplined stop-loss and risk management rules, then you’re taking a calculated risk for a high reward, not a foolhardy one.