What is a reversal day?
A top reversal day is when a price trades higher than the previous day’s trading session, but closes lower than the previous day’s close. As you might expect, a bottom reversal day is the opposite of this – when there is a lower low than the previous day and a higher closing price.
If the sessions price range is wide and made on heavy volume, a reversal day is more likely to imply a change in the pricing trend. It may not signal an exact end to the trend, but possibly a short to medium term change in the trend.
As well as a reversal day, you can have a two-day reversal, which is similar in concept to the reversal day, but over two days as I’m sure you guessed.
The steeper the existing trend, the more likely a reversal day will mean that there will be a pause or reversal in the trend.
What is ‘the spike’?
Also known as a ‘V’ formation, the spike is a very large range day that can appear at market bottoms or tops. A spike made on a reversal day is even more significant – spike tops can signal a major reversal in the trend. Spike bottoms can also signal a reversal of trend but are less significant.
How do I use Reversal Days and Spikes to trade?
Typically, a spike on it’s own is not reason enough to trade – there must be other conditions present to make the spike significant. When an uptrend is accelerating, this typically means that more emotion is entering the market. This can result is a spike reversal that results in a big drop in the buying power in the market, bringing the trend back to a slower gradient of progression.
Reversal Days and Spikes for trading are an effective way to work out entry and exit points form a price trend. With practice you can roll this strategy into your group of CFD trading Strategies.