# Reversal: Definition, Example, and Trading Strategies

## What Is a Reversal?

A reversal is a change in the price direction of an asset. A reversal can occur to the upside or downside. Following an [uptrend](https://www.investopedia.com/terms/u/uptrend.asp), a reversal would be to the downside. Following a [downtrend](https://www.investopedia.com/terms/d/downtrend.asp), a reversal would be to the upside. Reversals are based on overall price direction and are not typically based on one or two periods/bars on a chart.

Certain indicators, such a [moving average](https://www.investopedia.com/terms/m/movingaverage.asp), [oscillator](https://www.investopedia.com/terms/o/oscillator.asp), or channel, may help in isolating trends as well as spotting reversals. Reversals may be compared with [breakouts](https://www.investopedia.com/terms/b/breakout.asp).

### Key Takeaways

*   A reversal is when the direction of a price trend has changed, from going up to going down, or vice-versa.
*   Traders try to get out of positions that are aligned with the trend prior to a reversal, or they will get out once they see the reversal underway.
*   Reversals typically refer to large price changes, where the trend changes direction. Small counter-moves against the trend are called pullbacks or consolidations.
*   When it starts to occur, a reversal isn't distinguishable from a pullback. A reversal keeps going and forms a new trend, while a pullback ends and then the price starts moving back in the trending direction.

## What Does a Reversal Tell You?

Reversals often occur in intraday trading and happen rather quickly, but they also occur over days, weeks, and years. Reversals occur in different [time frames](https://www.investopedia.com/articles/trading/07/timeframes.asp) which are relevant to different traders. An intraday reversal on a five-minute chart doesn't matter to a long-term investor who is watching for a reversal on daily or weekly charts. Yet, the five-minute reversal is very important to a [day trader](https://www.investopedia.com/terms/d/daytrader.asp).

An uptrend, which is a series of higher [swing highs](https://www.investopedia.com/terms/s/swinghigh.asp) and higher lows, reverses into a downtrend by changing to a series of lower highs and lower lows. A downtrend, which is a series of lower highs and lower lows, reverses into an uptrend by changing to a series of higher highs and higher lows.

Trends and reversals can be identified based on [price action](https://www.investopedia.com/terms/p/price-action.asp) alone, as described above, or other traders prefer the use of indicators. Moving averages may aid in spotting both the trend and reversals. If the price is above a rising moving average then the trend is up, but when the price drops below the moving average that could signal a potential price reversal.

[Trendlines](https://www.investopedia.com/terms/t/trendline.asp) are also used to spot reversals. Since an uptrend makes higher lows, a trendline can be drawn along those higher lows. When the price drops below the trendline, that could indicate a [trend reversal](https://www.investopedia.com/ask/answers/030415/what-zig-zag-indicator-formula-and-how-it-calculated.asp).

If reversals were easy to spot, and to differentiate from [noise](https://www.investopedia.com/terms/n/noise.asp) or brief pullbacks, trading would be easy. But it isn't. Whether using price action or indicators, many [false signals](https://www.investopedia.com/terms/f/false-signal.asp) occur and sometimes reversals happen so quickly that traders aren't able to act quickly enough to avoid a large loss.

## Example of How to Use a Reversal

![Image](https://www.investopedia.com/thmb/T-U0w5vJxWMs83ngfBAmqcC9dJ4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Reversal_Sep_2020-01-3289881e14af48f3a33d232f2f45d949.jpg)

**

The chart shows an uptrend moving with a [channel](https://www.investopedia.com/terms/c/channel.asp), making overall higher highs and higher lows. The price first breaks out of the channel and below the trendline, signaling a possible trend change. The price then also makes a lower low, dropping below the prior low within the channel. This further confirms the reversal to the downside.

The price then continues lower, making lower lows and lower highs. A reversal to the upside won't occur until the price makes a higher high and higher low. A move above the descending trendline, though, could issue an early warning sign of a reversal.

Referring to the rising channel, the example also highlights the subjectivity of trend analysis and reversals. Several times within the channel the price makes a lower low relative to a prior swing, and yet the overall trajectory remained up.

## Difference Between a Reversal and a Pullback

A reversal is a trend change in the price of an asset. A [pullback is a counter-move within a trend](https://www.investopedia.com/articles/trading/06/retracements.asp) that doesn't reverse the trend. An uptrend is created by higher swing highs and higher swing lows. Pullbacks create the higher lows. Therefore, a reversal of the uptrend doesn't occur until the price makes a lower low on the time frame the trader is watching. Reversals always start as potential pullbacks. Which one it will ultimately turn out to be is unknown when it starts.

## Limitations In Using Reversals

Reversals are a fact of life in the financial markets. Prices always reverse at some point and will have multiple upside and downside reversals over time. Ignoring reversals may result in taking more [risk](https://www.investopedia.com/terms/r/risk.asp) than anticipated. For example, a trader believes that a stock which has moved from $4 to $5 is well positioned to become much more valuable. They rode the trend higher, but now the stock is dropping to $4, $3, then $2. Reversal signs were likely evident well before the stock reached $2. Likely they were visible at before the price reached $4. Therefore, by watching for reversals the trader could have [locked in profit](https://www.investopedia.com/terms/l/lock_in_profits.asp) or kept themselves out of a now losing position.

When a reversal starts, it isn't clear whether it is a reversal or a pullback. Once it is evident it is a reversal, the price may have already moved a significant distance, resulting in a sizable loss or profit erosion for the trader. For this reason, trend traders often [exit while the price is still moving in their direction](https://www.investopedia.com/terms/e/exitstrategy.asp). That way they don't need to worry about whether the counter-trend move is a pullback or reversal.

False signals are also a reality. A reversal may occur using an indicator or price action, but then the price immediately resumes to move in the prior trending direction again.