Reversal Trading or Trend Trading? (Don’t Mess This Part Up)

“Buy Low, Sell High” is one of the worst pieces of advice you could ever give to a Forex trader.

 

How come?

Short answer — because reversal trading, (trying to pick tops and bottoms) gets you absolutely destroyed.

 

 

So if you haven’t already figured out my answer to the age old question “Reversal or Trend trading?”  Let me break down completely why trading reversals is a terrible idea.  So many reasons.

 

You can also watch this video for this topic below if you prefer.

 

 

This Is NOT Stock Trading!!!

 

Nor is it trading metals, or commodities, or Star Wars figures — all things with real, actuated worth behind them.  Items like this CAN be “overbought” or “oversold”.  There CAN be a way to determine if it’s valued to high or low.

 

This doesn’t always mean price is bound to reverse, but if done right, you can at least put the odds in your favor as to when it’s going to happen.

 

Currencies do not have this.  Of course, at some point, governments and governmental bodies can go in and adjust the price if they feel it’s too high or low, but these occurrences are rare, and a LOT can happen in the meantime.

 

But just remember going forward — currencies are never “overbought” or “oversold”. That’s not how it works.

 

The Big Banks Decide How Much Currencies are Worth Anyway

 

As is almost always the case, the big banks and institutions of the world set the price.  And they can make it go as high or as low as they want, until some large government entity steps in.

 

Don’t know what I’m talking about?  For the love of God, if there’s one thing you do today, read my blog on the Big Banks, or go watch the Video.  You need to know why price goes up and down if you’re going to trade Forex.

 

And the Big Banks LOVE Reversal Traders

 

 

Reversal traders are what make the spot Forex engine go, since they’re the ones feeding the traders for the Big Banks.  Confused?

 

If you watched the video, you’ll see where I mentioned a really neat tool called IG Client Sentiment, formerly known as the “SSI Indicator”.  It shows where spot Forex traders (dumb money) have their money positioned and how that amount of money has changed over time.

 

A fascinating thing happens when more money is put behind a particular currency — the Big Banks make that currency weaker.  Almost every…single…time.

 

Why do currencies trend in the first place?  Can anyone tell me?

 

There are two acceptable answers here:

 

• Traders love trying to pick reversals, so they’ll continue to put money behind a weakening currency.  Banks will see this, and keep making that currency weaker until traders give up and try to trend trade it.  Only then does the reversal happen
• A really big news event comes up, so big that even the Big Banks can no longer play God with the price — but not after they’ve whipsawed the shit out of price early to take out a lot of traders’ positions.

 

Will you ever see these answers on Twitter?  In the blogosphere?  LOL, no.  Here’s what you’ll see instead:

 

How the Internet Wonks Explain Currency Movement

 

Let’s take the EUR/USD for example.

 

Here’s how you report the news in Forex when a currency pair has moved a decent amount the past few days:

 

• Go to your favorite Forex news calendar and find all of the major to mid-major events that happened to both currencies this week.
• Pick whichever news events fit your narrative.  It doesn’t really matter which one of those you select.
• Say some shit like “EUR/USD bullish after Spanish Flash CPI numbers come out slightly better than expected”
• Hit SEND

 

You can’t lose.

 

 

The IG Client Sentiment Indicator doesn’t lie folks.  Go look at the most liquid pairs, and you’ll see this proven over and over again.

 

The news is only there to fuck with you.  And they do such a great job of it.

 

“Reversal Indicators”, LOL

 

People who use indicators on their charts that are made for finding reversals get slaughtered.

 

Why?  Because they don’t understand what you just got done reading.

 

And then they blame the indicator.  And don’t get me wrong, the RSI, Stocastics, CCI, and Bollinger Bands are terrible, but it was the Forex trader’s fault from the start.

 

When a currency trends, and they always will, reversal traders get slaughtered, especially if they’re using indicators.

 

In the USD/JPY daily chart below, look how many times the Stochastic Oscillator goes in and back out of the “overbought” and “oversold” zones, and still fails to call the reversal.

 

I even drew white ellipses around the only times it worked, and those last two are suspect.

 

 

If you were using the fast Stochastic Oscillator to call reversals, you might not even have an account left to trade.

 

And the RSI was even WORSE.  It didn’t even call the big bullish reversal at the very bottom.

 

I’ll use red ellipses to highlight the failures, and a white to illustrate the only time you would have (maybe) made money trying to call a reversal.

 

 

And feel free to draw Bollinger Bands there too.  It aint pretty.

 

Again, these indicators may have a place in stock trading, I don’t know.  They should work better, because as I said at the top of the article, stocks at least have realized values to them.

 

But if there’s not already enough reason to avoid these indicators, the fact that they’re fundamentally flawed from the start is reason enough, because currencies are never truly “overbought” or “oversold”.

 

Look, I’m an indicators guy, but the best reversal indicator I’ve ever seen in Forex still sucks ass.  And I have tested thousands.

 

So What Do We Do Now?

 

You completely shift gears.   If you haven’t come to grips with the fact that when trading reversals, you ARE the dumb money, then I cannot help you any further, and nothing in this blog or YouTube Channel is going to either.

 

The good news is, as euphoric as it can be finding that reversal right when it happens, nothing is as euphoric as having killer gains in your trading account.

 

And by trend trading the right way, you’re well on your way there.

 

When putting together your system, you want to set it up to where you can reasonably figure out when a currency pair is done screwing around and has decided to trend one way or the other.

 

That’s it.  Money management will do the rest.

 

Am I oversimplifying?  Yes.  But that really is the bones of the set-up you’re looking for.  The rest of this blog, as it grows, will focus on just what kinds of things to put into that set-up.

 

This entire site, along with the YouTube channel, and to a certain degree the Podcast too, are dedicated to Forex Trend trading.

 

If anyone tries to sum trend trading up in one article or video, unsubscribe from them immediately.

 

The answer isn’t super-complex, but it’s not ridiculously simple either.  You need a real blueprint, and that is what I will attempt to provide, whilst steering you away from the thing that will derail everything if you allow it to.

 

Conclusion

 

Many of you love reversal trading because of how great it makes you feel when you went into a 4-5 trillion dollar a day market and were able to find exactly where things turned around.

 

Problem is, it’s not possible to do that enough times to where you actually become a profitable Forex trader.

 

Oh, and not to mention the very entities that move price up and down are against you the whole time.

 

And the fact that there aren’t even any indicators you can use to save you.

 

I’m running out of positives.

 

I want to help you become an amazing trader that can bring in big, consistent gains and be the type of trader who can build up a huge account or get hired on by a trading firm.

 

But you will have an extremely hard time doing that as a reversal trader.  To the point where I can no longer help you.

 

Because you don’t want the odds in your favor, you just want a thrill.

 

I guess all I can say is thank you for reading my blog.  If you want, you can stay with this site and watch me turn traders’ fortunes around for good, but until you make that big switch to trend trading, it won’t be yours.

 

— VP