How to Identify and Trade Role Reversals in FX
How to Identify and Trade Role Reversals in FX
What Is Role Reversal?
Role reversal is an essential technique for increasing the expected value of FX trades. Anyone can easily implement it by drawing lines on a chart, and it’s crucial due to its importance. It has become a fundamental concept for FX traders.
This article will explain the reasons why you should target role reversal and how to identify it.
Summary of This Article
This article will explain the reasons why you should target role reversal and how to identify it.
Summary of This Article
- Role reversal refers to the change in the role of resistance and support lines when they switch positions.
- The reason to target role reversal is that it is easy to understand, simple to execute, has high expected value, and leads to wider profit margins.
- The key point to be cautious of when targeting role reversal is the possibility of missing an entry, which can lead to opportunity loss.
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What is Role Reversal?
What is Role Reversal?
Role reversal occurs when a previously broken line comes back and the resistance and support lines switch roles. The word "role" refers to the role, and "reversal" means a change. Thus, role reversal means a change of role.
Role reversal happens when a trend reverses, and a previously recognized line breaks, causing the support line to become the resistance line and the resistance line to become the support line.
After a price bounce occurs and the previously recognized line is expected to reverse again, two actions happen: one person enters the trade, anticipating a bounce, and another decides when to take profit and exits. This leads to a break in the line and the formation of role reversal.
Role Reversal
As shown in the diagram above, role reversal occurs when a range break happens, and the resistance and support lines switch roles. Role reversal frequently happens in the market, so it's crucial to remember.
As shown in the diagram above, role reversal occurs when a range break happens, and the resistance and support lines switch roles. Role reversal frequently happens in the market, so it's crucial to remember.
Reasons to Target Role Reversal
Reasons to Target Role Reversal
Now, let's explore why you should target role reversal.
Reasons to Target Role Reversal
- Easy to Understand and Implement
- High Expected Value
- Wider Profit Margins
- Easy to Understand and ImplementRole reversal is easy to implement because anyone can draw lines, making it accessible even for beginners. Additionally, since it involves entering after the range break is confirmed, the chances of a false signal are low.
The concept of role reversal—where resistance and support lines switch roles—is simple enough for beginners to understand. - High Expected ValueThe reason role reversal has a high expected value is that it is based on sound reasoning. Role reversal frequently appears in areas where you can clearly draw lines, making it reliable and repeatable, which further contributes to its high expected value.
Furthermore, waiting for the candle to close after a break and then entering gives you a higher expected value than entering immediately after the break.
This method provides more evidence and increases the likelihood of success compared to taking reckless entries. - Wider Profit MarginsRole reversal is not only easy to understand and have high expected value, but it also leads to wider profit margins. Unlike range-bound markets, where price moves within a fixed width, role reversal causes price to break through the range and move significantly, giving you the opportunity to achieve larger profits.
As role reversal results in wider profit margins, you can also amplify your gains with higher leverage. Entering during a role reversal and targeting larger profits is a good strategy.
The Difference Between Role Reversal and Return Move
The Difference Between Role Reversal and Return Move
Let’s clarify the difference between role reversal and return move.
A return move refers to the temporary return of price to a previously broken line. If price then bounces at the resistance or support line, it becomes a "resistance/support flip," or "role reversal."
Types of Role Reversal
Types of Role Reversal
Let’s now explore the different types of role reversal that can occur when it happens.
The types of lines where role reversal can occur are as follows:
- Horizontal Line
- Neckline
- Trendline
- Channel Line
- Flag
- Moving Average Line
Horizontal Line
Role reversal on horizontal lines is easy to spot, making it accessible even for beginners. Additionally, the price movement after the break is easy to understand, which is a key feature of this type of reversal.
In the image above, the resistance line has flipped to become the support line in a horizontal line role reversal.
Role reversal on horizontal lines is easy to spot, making it accessible even for beginners. Additionally, the price movement after the break is easy to understand, which is a key feature of this type of reversal.
In the image above, the resistance line has flipped to become the support line in a horizontal line role reversal.
Neckline
The neckline is the line that marks the starting point of price movement in specific chart patterns like double tops and double bottoms.
Role reversal at the neckline often occurs in patterns such as double tops or head and shoulders.
In the image above, the role reversal shows a double bottom, where the resistance line has flipped to become the support line.
The neckline is the line that marks the starting point of price movement in specific chart patterns like double tops and double bottoms.
Role reversal at the neckline often occurs in patterns such as double tops or head and shoulders.
In the image above, the role reversal shows a double bottom, where the resistance line has flipped to become the support line.
Trendline
Trendlines are drawn according to the direction of the trend—upward or downward. Unlike horizontal lines, trendlines can be more difficult to judge for role reversal.
In the image above, the role reversal occurs at an upward trendline where the resistance line flips to become the support line.
Trendlines are drawn according to the direction of the trend—upward or downward. Unlike horizontal lines, trendlines can be more difficult to judge for role reversal.
In the image above, the role reversal occurs at an upward trendline where the resistance line flips to become the support line.
Channel Line
When a trendline is drawn, a parallel line can also be drawn on the opposite side. This parallel line is called the channel line.
In the image above, the role reversal occurs at an upward channel line, where the support line has flipped to become the resistance line.
When a trendline is drawn, a parallel line can also be drawn on the opposite side. This parallel line is called the channel line.
In the image above, the role reversal occurs at an upward channel line, where the support line has flipped to become the resistance line.
Flag
A flag is a chart pattern that forms during a trend and allows a channel line to be drawn. The pattern takes the shape of a flag, hence the name "flag."
In the image above, the role reversal occurs at an upward flag pattern, where the support line flips to become the resistance line.
A flag is a chart pattern that forms during a trend and allows a channel line to be drawn. The pattern takes the shape of a flag, hence the name "flag."
In the image above, the role reversal occurs at an upward flag pattern, where the support line flips to become the resistance line.
Moving Average Line
The moving average line is a key indicator that connects the average price over a specified period, helping to track price trends.
In the image above, the role reversal occurs at the moving average line, where the resistance line flips to become the support line.
The moving average line is a key indicator that connects the average price over a specified period, helping to track price trends.
In the image above, the role reversal occurs at the moving average line, where the resistance line flips to become the support line.
How to Identify and Spot Role Reversal
How to Identify and Spot Role Reversal
Let’s now discuss how to identify and spot role reversals in the market.
How to Spot and Identify Role Reversal:
- Draw Key Lines
- Confirm the Break of the Line
- Enter When the Price Returns to the Line
- Draw Key LinesStart by analyzing the market using longer timeframes (1 hour or more), and identify the price levels that have been previously significant. Lines where the price has bounced multiple times are often the most reliable. The more times a line has been respected (bounced off), the more reliable that line becomes. Typically, a line that has seen at least three bounces can be considered significant.
If there has already been a previous role reversal at that level, traders are more likely to notice and trade at this line again.
Make sure to perform proper market analysis and draw the correct lines to spot potential role reversals. - Confirm the Break of the LineWaiting for the price to break the line and confirm it is crucial in role reversal trading. Regardless of the timeframe, wait for the candlestick's body to close beyond the line, confirming the break.
Be cautious not to enter prematurely as the price might briefly reverse and test the line before continuing in the break direction. - Enter When the Price Returns to the LineOnce the price breaks the line, wait for it to return close to the line before entering a trade. This is a typical role reversal setup.
For setting stop losses, it is effective to place them where false breaks may occur or if the chart pattern's logic is invalidated.
If you want to increase your risk-reward ratio, you can quickly exit if the price does not return to the line. This method is highly reproducible and can lead to profitable trades.
Precautions When Targeting Role Reversals
Precautions When Targeting Role Reversals
Let’s now look at some important things to watch out for when targeting role reversals.
Potential to Miss an Entry Point
One of the risks of role reversal trading is the possibility of missing an entry point. Sometimes the price might only slightly return before continuing in the break direction, or the price might not even return to the line at all, continuing in the breakout direction.
If you aim too much for a perfect role reversal setup, you may miss potential entry opportunities. However, looking at it from another angle, missing an entry point could also mean you are being more selective and focusing on higher-quality trades. This approach is generally better than entering hastily and losing money.
Opportunity Loss
Role reversals can sometimes lead to opportunity loss. While you may be waiting for the price to return to the line to enter, the price could break out and continue moving without coming back, leaving you with no entry opportunity.
On the other hand, if you try to jump in too early on the momentum after the break, you risk entering into a false breakout, leading to a loss.
However, role reversals tend to have fewer false breakouts and provide more reliable, reasoned trades, making them a good strategy for growing your capital over time.
Master Role Reversals for High-Expectancy Trades
Master Role Reversals for High-Expectancy Trades
Role reversals are both simple to understand and offer high expectancy in trades. Additionally, they offer wider profit margins, so even with high leverage, you can maximize your potential profit.
Trading based on role reversal provides high reproducibility and is one of the strongest trading strategies. Mastering role reversals will allow you to make high-expectancy trades and improve your trading success.