Reversal trading strategy

trading chart

Investors speculate that these shares will be discovered at some point and that many investors will then buy them, causing prices to climb again. The reversal strategy is practically the opposite of the trend-following strategy.

Reversal strategists behave counter-cyclically 

In this stock market strategy, investors buy the stocks that have fallen the most in the previous month and assume that the trend is reversing. For this reason, the reversal strategy is also called a "counter-cyclical strategy". However, this strategy approach is almost identical to the classic term "anticyclical stock market strategy".  

With a counter-cyclical investment strategy, the investor tries to invest against a recurring or habitual event. The investor invests against habit and thus against the masses.

Disciplined behaviour indispensable 

Both the reversal strategy and the counter-cyclical stock market strategy oppose the prevailing trend on the securities markets. There is a consensus among stock market experts that reversal strategies have the serious disadvantage that investors often lack the courage to consistently carry the method through to completion. Self-confidence and discipline are needed to put these strategies into practice.

Caution: Pitfalls of hasty action 

Investors should bear in mind that they could sell their shares too early and miss out on profit opportunities. Moreover, it is not uncommon to end up in the red with an investment.

However, the reversal strategy can also be particularly promising. With a little luck in the selection, quite respectable returns are possible with this approach.

"Buy when the guns are thundering!"

Counter-cyclical investors buy their shares when other market participants sell their securities. These investors then have the patience to wait until the downward trend turns and then until the euphoria is at its greatest before selling the securities. Anti-cyclical investors have such a big ego that they hardly let themselves be infected by the bad mood of other investors. 

Anti-cyclical investors assume that a bad market sentiment means that most investors have already sold their securities investments and thus sufficient liquidity can again be raised by the market for a longer-term price increase.

forex

Finding the optimal entry and exit point

Over the years and with the application of digital aids, a large number of systems have been developed to indicate the right time for transactions in equity investments. These include mathematically based methods designed to signal the right times.

Practical example

One method of calculating the optimal transaction time is, for example: The investor in Exness download area notes down the respective weekly closing price of the current yield, as it can be easily found on the internet. Then he calculates the 4-week average price and determines the highs and lows.

An entry signal is then generated as soon as the average price is at least 13% below its last high. Correspondingly, an exit signal can be interpreted as soon as the average price has risen by at least 20% from its last low.