KEY REVERSALS

Binary option traders can benefit from any technical signal that helps them predict the direction of price. While trend analysis can tell traders to keep trading in the same direction, the concept of a key reversal tells traders when they can expect a trend to end and should therefore start making market decisions in the other direction. Key reversal patterns do not occur often, but are said to be reliable when they do.

A chart type that shows the high, low, open, and close prices of each time period, such as a bar or candle chart, is necessary to identify a key reversal pattern. Line or dot charts simply do not show enough information. Traders most often look for key reversals on daily charts, but the concept can be applied to shorter time frames as well.

There are two major types of key reversals to look for. They both occur in the midst of an uptrend or downtrend. Consider the first in the context of an uptrend: the key reversal occurs on a day where a new high in the trend is made, yet the close of the day is much lower–near where it opened and away from the high. This pattern indicates that a lot of buyers got caught in a sell-off, which will likely create the selling momentum needed to generate a downtrend.

The second pattern has a similar concept and is potentially even more powerful. The key reversal occurs after a candle where a new high in the uptrend is made, but that closes below the entire trading range of the previous day. This is known as an engulfing candle or bar and is considered to be a powerful indicator of trend reversal. Simply flip the logic of the definitions upside-down to use these concepts to find key reversals that signify the ends of downtrends.