Right today we need to have a little talk about fake reversals. Now a lot of you budding little traders out there have been reading our tutorials, bringing yourself up to speed with the trading platform you’re using, monitoring the news etc. We commend you on this, we really do, but we also keep getting emails questioning our trading genius because of misapplied strategies and techniques. One of the most popular mistakes is misdiagnosing a reversal, or more accurately thinking a reversal is taking place when it’s not quite there yet. And believe me it’s binary traders who are the biggest culprits here, this is because binary options can be so rapid fire and so addictive that you jump the gun and trade too early, negating the value of the trading signal or making an otherwise in the money trade go bad.
Now for an example. You’re trading on an economic indicator. So you’ve woken up, stumbled out of bed, missed the toilet bowl, and seat, hit your slippers, yuk… You’ve made your coffee, gradually gotten your eyes to unstick, perused your economic calendar and by Job you’re ready to trade aren’t you!? A piece of nifty economic data is due to be released any minute. Say it’s NFP so you’ll be trading on USD/JPY. The figures come in and they’re baaaaaad for the USD. Significantly worse than expected. You time your trade perfectly, getting in just as the USD begins to drop, your PUT trade is looking successful from the get go, there is no way on earth it could possibly end out of the money. But wise grasshopper catch tend at reversal too, make more money, and don’t forget breathe… In the ten minutes after the terrible trading day for the USD which you have masterfully capitalised on and made big dough it hits what looks like a bottom. You’ve spotted this as the next candlestick starts to look uncertain as to where it’s going, you’ve confirmed it by checking your RSI which is indicating that USD/JPY is greatly oversold and ripe for a reversal. Now what a lot of you silly rabbits have been doing at this point is placing your CALL trades as soon as the price is looking like it’s reaches a bottom and have been ending up out of the money because of it.
This can all so easily be averted by recognising one simple fact. Reversals do not all happen as smoothly and as easily as you might hope. In fact off the back of most major economic releases that cause radical price action you get fake reversals. The price stabilises, looking as though it’s about to reverse, and then continues to drop. It’s essential that before you take a position you watch out for these fake reversals and they are very easy to spot. The way to do this is just to hold your horses for just a little while longer and wait and see. I know this can be tricky, especially when you feel you’ve just found the perfect moment to act, but just a little bit of patience will go a long way. It’s all in the candlesticks, wait for at least three candlesticks before taking your position, if they start getting shorter and shorter and a further drop does not take place then place your reversal option, in this case a CALL, if not wait for the price to drop a little further, wait a few candlesticks, and get in just as it starts to rise. Simple as that! No go play!