It’s not easy to predict a market turn. But knowing how to do it is an important part of trading.
Being able to accurately predict a market turn can:
- Create big trades, at the point where new trends start
- Help you get out of trades that have gone bad
- Make you look cool at cocktail parties (LOL)
In this post I’ll show you my favorite 7 ways to predict a market turn.
Method #1: Long-Term Divergence
My favorite method for predicting a market turn is to watch for divergence on the weekly and monthly charts.
Let’s look at an example from the currency market, and then the stock market.
Here’s a weekly chart of the currency pair EUR/GBP:
In June of 2015, the EUR/GBP was falling – but the Relative Strength Index was rising.
Traders were selling EUR/GBP, but the rate at which they were doing it had decreased. This was an early warning sign of a big reversal.
Now, let’s look at Apple.
In this chart, I’ve removed the RSI from the bottom to make it easier to see the trades.
At point of the recent major reversal points for AAPL, weekly divergence showed up.
If we simply add a trendline to the chart – and wait for that trendline to break before the trade, we can catch huge moves lower.
Some Notes About Divergence: Divergence can be tricky. It shows up often on short-term charts, and that can create a lot of “false alarms.” So when looking for major reversals, it’s best to stay on the weekly – or even the monthly – charts.
Get my divergence indicator, free: I built a highly accurate divergence indicator – I call it “Knoxville Divergence.” You can download it (free) for most charting platforms here.
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