Last week Friday, I put out a piece titled Reversals + Context.
If you missed it, you can catch up here.
In that update, we looked at several reversal signals and how the overall context of the market around those reversal signals played an extremely important part in telling whether the reversal would work or not. In other words, focusing on a single candle (or formation) wasn’t enough to justify a trade.
We looked at the USDZAR, and here is the chart from last week that we considered:
I posed the question: Does this classic bearish pin-bar suggest that price is going to pause and keep going up, or reverse and head down? I asked you to vote (and thank you to those who did!)
Results: 66% of you said that the Rand would weaken further, and you were right.
What was the context that suggested further Rand weakness?
The huge bullish candle leading up to the 13.50 zone told me the story, and was more important than the pin-bar, in my opinion.
Did the pin-bar reversal have any meaning or significance? Yes! It certainly did have an effect on the market – it was not a reversal but a pause. So it did change the direction, from up to sideways – which is a change of direction, isn’t it?
The learning is this: A reversal signal may cause the market to reverse, or just pause. The context of the market tells you which is more likely.
I find this particularly help when I am in a trade and I see a reversal signal print against me. Do I get out early or do I hold?
The answer is usually found in the context of the larger market.