Posted in Finance, Accounting and Economics Terms, Total Reads: 397
Reversal may be stated as a change in the direction of a trend in prices. On a chart of prices, reversals undergo a sizable change in the structure of prices. An uptrend, which can be said to be a series of higher maxima and higher minima, reverses into a downtrend by shifting to a series of lower maxima and lower minima. A downtrend, which is a series of lower maxima and lower minima, reverses into an uptrend by changing to a series of higher maxima and higher minima. It may also be referred to as a ‘trend reversal’, ‘rally’ as in market rally or ‘correction’.
A reversal may be a positive or negative transformation against the prevailing trend. Trading analysts look out for these patterns because they would be able to show the requirement for a different trading plan on the same stocks.
For example, if a trading analyst holds stock A and observes a reversal pattern, he or she may want to think about closing his or her current long position and if in a short position to make the most out of the potential downward movement of the share's price.