Glossary
Trend reversal
A change in the direction of a price trend, from up to down or down to up, as opposed to a temporary pullback within the trend.
On this page
A trend reversal is a lasting change in the direction of a price trend: an uptrend turns into a downtrend, or the other way around. It differs from a Pullback, which is a brief move against the trend before it resumes. Spotting reversals early is one of the main goals of technical analysis, and one of its hardest, because most trends pause many times before they actually end.
How it works
Traders define a trend by its swing points. An Uptrend makes higher highs and higher lows. A common working definition of a bearish reversal is the first lower high followed by a break below the most recent higher low. The bullish version is the reverse.
Several signals are used to anticipate or confirm a reversal:
- Chart patterns. Head and shoulders, Double Top and Double Bottom formations are classic reversal shapes.
- Candlesticks. Engulfing patterns, morning and evening stars and hammers appear at turning points, though on their own they are weak predictors.
- Momentum divergence. Price makes a new extreme while an oscillator such as RSI does not. See Divergence.
- Moving-average crosses. A Death Cross or Golden cross confirms a change, but late.
What to watch for
Most apparent reversals are not. Calling the top of a strong trend repeatedly is a common and costly mistake, and confirmation signals arrive only after part of the new move has happened. That trade-off between early and reliable is built into every reversal method. Fundamental news, such as a guidance cut or a change in interest-rate policy, often drives the reversals that last.