Reversal definition

A reversal is a change in the direction of a price trend. A bullish reversal turns a downtrend upward, while a bearish reversal turns an uptrend downward.

A reversal can occur in forex, shares, commodities, indices, and CFDs. It is often triggered by a shift in sentiment, an economic data release, an earnings result, a central bank decision, or a strong reaction at a support or resistance level. Traders look for confirmation from candlestick patterns, volume, momentum indicators, or a break of a trendline before treating a turn as a reversal.

A reversal differs from a pullback. A reversal is a lasting change in the main trend, while a pullback is a temporary move against a trend that then resumes its original direction. The risk lies in mistaking one for the other: act on a pullback as though it were a reversal, or the reverse, and you end up on the wrong side of the trend.

Reversal Example

A stock rises from USD 40 to USD 55 over several weeks.

It then fails to push above resistance and drops below a key support level at USD 50.

Traders may read this as a bearish reversal, because the earlier uptrend has turned into a downward move rather than pausing briefly.