With most types of market reversal trading, divergences and contrarian trading are appealing because they present a massive potential for earnings. Since digital options trading is only going to pay out a fixed amount, reversal trading may not seem quite as attractive as it would be in traditional markets. There is no opportunity for gigantic gains and this form of trading carries additional risk. Trying to estimate top and bottom market prices is simply tough to do. It is far better to wait around to see the actual bottom than to attempt to speculate where it is. Even with the additional risk, price reversals, divergences, and contrarian insights are still a fine strategy for intermediate to advanced level traders.
Markets certainly do not trend in a perfectly straight line and of course they are not going to reverse in a perfectly straight line either. Reversal patterns are not going to appear in a single day or single candle. Whenever these kinds of patterns start to show up, particularly in combination with support or resistance, they may be utilized to effectively forecast market direction. Reversals can happen at any time and are beneficial tools for both day trading as well as range trading. The shorter the period of the chart the smaller the relevance of the reversal, so you’ll want to make use of numerous time frames to recognize the long-term support and resistance levels.
Divergences occur whenever an indicator like as MACD or stochastic is unable to produce a higher peak at the time that the asset produces such a peak. This lower peak will act as an indicator of weakness, with price movement slowing and a potential reversal forthcoming. The caution here is that divergences do not always mean that a reversal is coming, but that the market is starting to grow weaker and a reversal is possible.
It’s not uncommon for a powerfully trending market to diverge with an signal for numerous peaks as it begins to slow. The best way to use divergences in trading is when they show up in a number of time frames simultaneously. This is known as convergence of divergence. Divergences may be applied to forecast price reversals and ranges when applied together with some type of support and resistance tool. Should divergence show up while the asset is nearing a prospective area of support or resistance, the likelihood of a reversal increases.
Contrarian trading employs a mixture of several techniques in order to produce a signal to trade a reversal. Trading in opposition to the market is an action that many experts are going to tell you not to do, and this is typically (but not always) good advice. Contrarian trading can call for the use of oscillators, price trend lines, support and resistance, Fibonacci, and plenty of Digital Options experience to forecast when the price of an asset is going to move in reverse. Market entry is based upon the prediction that the final market participator has moved into the market and the market must then move in the reverse direction. If no more sellers are participating, the market is going to move upward. No more buyers and it will move downward.