A reversing market is a market which established a price trend in one direction, but has now turned and started moving in the opposite direction.
How do we spot this? The market has made a decision that fair value is no longer towards one direction. Fair value has now changed.
What has brought this change along? Factors which can cause a market to reverse include such things as momentum price action and volume.
The change occurs when speculators decided that the market should no longer be at a certain point. This could be due to a change in the market trend and hence, the market reversing.
The reversing market can occur both upwards and downwards. There may be an instance where a market is moving upwards, only for the market to no longer believe it should be moving to the upside.
The market may then look to reverse, retracing the move towards the downside
In a similar fashion, the market may have been trading to the down side; only for the market to no longer believe it should be moving to the downside. The market may then look to reverse and move towards the upside.
It may not always be obvious that a market is motioning towards a reversal.
This is why it is important to be aware of the factors which may cause the market reversal as mentioned earlier, namely price action, momentum and volume at the levels at which a market is trading.
You should look to see if there’s an increase in any of those factors. If the markets been up, an increase on the sell side could signify a reversal and movement to the downside.
Conversely, if the markets have been down, an increase on the buy side could signify a reversal and movement to the upside.
Sometimes a catalyst for these market reversals could be external factors, such as fundamental news.
News or unexpected data may be released regarding the markets you are trading that may cause the market to reverse its trend.