A reversal refers to a significant change in the direction of an asset’s price. Reversals can occur in both uptrends and downtrends and are often considered important signals for traders and investors.
In an uptrend, a reversal would mean that the asset’s price starts to move downward after a period of rising. Conversely, in a downtrend, a reversal would indicate that the asset’s price begins to move upward after a period of falling.
Reversals are often identified using various technical indicators and chart patterns, such as moving averages, trendlines, and candlestick formations like Doji or Engulfing patterns. These are used in conjunction with other tools to confirm the likelihood of a reversal and to establish entry and exit points.
It’s important to differentiate between a reversal and a retracement. A retracement is a short-term price movement that goes against the prevailing trend but doesn’t necessarily indicate a change in the overall trend direction. A reversal, on the other hand, suggests a more sustained and significant change in direction.
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