Today we are going to be talking about how to find and confirm a reversal when trading within the stock market. Understanding when a stock has begun to reverse is key to finding the best opportunities as well as knowing when to cut losses. It also helps you stay out of positions that are frankly a waste of your time. But before we get into this all I ask of you in return for this video is that you hit that beautiful and ravishing like button.

And also don't forget to subscribe for more short, sweet and simplified videos on how to trade the stock market. Ok, so a lot of folks struggle to understand what a reversal actually is because of the fact that during an uptrend, there tends to be also periods of selling off. But a short period of selling off doesn't necessarily mean it's a reversal. Just like how a down day in the overall market doesn't necessarily mean that we're in bear territory.

So let me just start by explaining that a reversal is simply when the stock changes its direction overall, not in the minute-by-minute price action. At any given time, the price action may be going up or down, but to determine the overall direction, we just need to look at the long term SMA line, identify if it is upward or downward, and measure the strength of the uptrend or downtrend by looking at the real estate. between the price action and the long-term SMA line. Now, a confirmation of a reversal happens when the price action breaks and holds above the long term SMA line.

This is compared to an entry point confirmation that happens when we see the first candlestick hold above our regular SMA line. As you can see, we have two SMA lines. We have the red one and we have the blue one. The red one is the long-term SMA that's the one that we use for figuring out what direction the overall stock is pointing as well as confirming reversals of directions.

both RSM A lines and both offer different types of confirmation or a regular SMA line offers entry point confirmation and then our long-term SMA line that offers reversal confirmation. If this sounds confusing, it's really not SMA lines all for confirmation points. That's sort of one of their main purposes and based on how you configure them, they offer different confirmation, but you could take this a beautiful step further by combining both confirmations to find the position where the odds are most in your favor. Okay, but before we get into that, let's go more into the why and so I'll give you a few examples of the why before we get into actually how to spot reversals.

So the most obvious reason why is to protect ourselves. If we are trading and see a perfect setup such as this one on Gush, we need to make sure that we are aware when the trend reverses so that can identify a potential pattern, break, and save ourselves losses. Another reason is so that we can simply play a better offense using our ability to identify a solid uptrend to take advantage of entry points. Furthermore, price action decreasing.

Two new line of support declared by the SMA line is a huge sign of strength of trend direction. This allows us to analyze and say okay, well look at this point, it held the SMA line as support. So look, this is a confirmation that the overall direction is still upwards and that's one of the big benefits when we see it holding support. But on the flip side, it also allows us to play a more defensive offense because like with a PHA, we can spot not only a solid uptrend and take advantage of that, but also we can protect ourselves by understanding when we were entering into reversal territory when we see that break below our long-term SMA line.

And the one last reason why is because we could tell if a direction of a stock makes that stock a non-starter stock or not. Is this stock action opportunity worth taking? and that's I Think something that you should ask yourself before you enter into any position. Anyways, looking at AMD we see a huge amount of price strikes and rapid volatility, but then we see fighting back and forth from uptrend direction to downward direction, but never much strength in comparison to before. This allows us to stay out of positions that aren't great opportunities for us and that's honestly one of the most valuable things that you could possibly have is something that indicates whether or not it's worth taking a position.

Okay, so let's apply this. Looking at aims, we could see that after the upper reversal here, we were presented with an extreme amount of great entry points, allowing you to buy in upon confirmation. And right, the price breaks up and over our regular blue SMA line. But the important part of this is that we can see increasing strength.

That is to say, real estate above our long-term SMA line. As you know the farther away the stronger it is. because our red SMA line is our direction indicator as well as our reversal indicator. we know that the stronger it is be stronger the trend is.

It's quite simply a measure of trend strength and in this case, the price action signify strength in its uptrend. Then we see it moving closer and losing tread strength but still remaining strong. And the point of this is the closer we are to our red SMA line, the weaker the trend is. So this allows us to measure the strength of the overall direction of the stock and use it to our advantage.

The upper trend here is much stronger than the upper trend here, and that is something that you need to know when looking for entry points. Obviously, price action that has a strong uptrend is going to be more attractive for entry points as compared to price action that is weak or even worse has broken its uptrend and reversed into downtrend in territory as the signified here. But I Think the problem is that a lot of folks just don't know when opportunities are drying up and continue either adding to their position or even holding after the price strength starts to lose its strength. So it's extremely important to make sure that your upward Direction retains itself.

And of course, if you're a short in a position, it is the opposite. But it's the same idea when shorting, We are looking for signs of price weakness and the farther below a stock goes from the price action, the stronger the downward direction of that stock is. It's the same idea, it's just in Reverse. But the beauty with analyzing for signs of a reversal is that we can actually break down and see how strong or how weak our price action is while it is up trending or it's down trending.

This is extremely important because we can be much more confident holding a position that is increasing in price strength, whereas with one that is weakening, we will need to start watching for validation points or aka our exit points. But moreover, with something like sprint, we do see that it is up trending overall after confirming a reversal here, but quite frankly, there isn't much price strength. This is at this point a non-starter but then we see this dip to our long-term SMA and we saw it hold here. This declared that SMA line has support and confirmed that yes, indeed, Sprint had the price rights to retain its uptrend at this point.

Then later we saw a confirmation above our regular term SMA line and we saw some rapid price appreciation. But the trend strength over the long term SMA line is quite strong and doesn't yet show signs of decreasing. So you could see how important it is to confirm reversals and identify and rate the strengths of uptrend and downtrend. Because honestly, this allows you to filter out positions that are literally just a waste of your time.

So many people spend so long just in positions that are such a waste of time and we're non-starters To begin with, it's extremely important to be able to filter out positions that are not worth your time. Oftentimes maybe you'll get a couple sets, but more most the time you'll lose. so make sure that you have the general trend direction in the favour that you want it to be. Obviously, if you're shorting a stock, you're going to go for stocks.

They're down trending. so it's not like you need to find socks that are all up trending. So now you may wonder if we are waiting for signs of a reversal to take a position and we are only willing to get in when we see both a confirmation of a reversal as well as a confirmation entry point. One that mean that we're missing out on part of the move and the answer to that question is frankly, yes, that is what that means just looking at a DMA.

We can see on this particular day that when we broke above the reversal, we had a great entry point and some decent appreciation. but buying in at oversold that around 4:30 a dish would have netted us a much larger gain than if we had taken the other route. So yes, waiting for both confirmation and a reversal will mean that you will lose part of your game, but that's the price you pay for consistency and the alternative is much worse. And that's not waiting for confirmation and instead being in a situation where there's nothing else pointing towards the continued appreciation of the stock.

For example, here, we have a discount to oversold on the RSI, but it's trading below our long term. SMA Sure, we could have taken a position there upon short-term confirmation, but without a long-term uptrend confirmation, we are just as likely, if not more likely to see it keep going downwards And this was what happened. We saw this quick appreciation, but then failure to break followed by a continued sell-off later. So while in this later situation, it would have been a good idea to buy at a oversold discount and then hold it.

That isn't exactly something that we can predict, and that's why I Always advise making sure to not only have your entry confirmation in your favor, but also to have a confirmation in terms of the trend of the stock, the direction of the stock as well. So in summary, just to summarize this point: yes, waiting for confirmation will eat some of your games, but in the long run, if you execute on this right, it will result in more consistent profits. In my opinion, it makes more sense to make more money overall than it does to make more money in one trade. but everybody has their own different opinions and different styles and different goals.

And I think that you need to adjust that accordingly. But my suggestion is to have concrete points at which you're going to be executing on your position anytime that you take a hundred percent of the move or anywhere over 90 percent of the move you need to ask yourself, Is this something that's sustainable? More likely than not, it's not going to be sustainable and you need to have a plan so that you can be consistent over the long run instead of just one or two trades. But often times people do get frustrated with me and this is an honest point. I Always emphasize buying stocks when they're at a good deal, perhaps when they're oversold, but then I also turned it around and kind of say that hey, yes, you should do that, but you also need to wait until confirmation.

You're not just buying dead dogs on the side of the road. Instead, you're buying dead dogs that have signs of recovery. I Guess those would just be sick dogs. And while there are opportunities where we have a confirmation entry point confirmation over the long term SMA as well as being below fair value or even oversold, there's also many times where this is not true.

There are times when we have either a confirmation, but then not a good deal or a good deal. On the horror side, but not a confirmation. and this is sort of a reality of different positions and different position ranks. So what this really comes down to at the end of the day is to ranking and balancing your positions.

What is the most important part for putting the odds of success in your favor? We know trading is an odds game, so what combination of things can we put? What combination of variables can be put together to increase the odds of success and put them as much in our favor as possible. When executing in positions, you may have a hard time finding setups where everything is in your favor. That's just the reality of the game, but you can find setups that have a combination that puts the odds of success overall in your favor. Maybe the RSI is a little bit higher than you'd want it to be, but everything else is looking perfectly so other things still have good odds.

So you have one thing with bad odds and then 10 things with really good odds. You can kind of give it math as to which you would value more. Yes, it would be better if everything was perfect. Will it always be perfect? Or will it most the time be perfect? Probably not.

Probably not. So you need to find setups that have a combination that puts the odds of success in your favor. The RSI is no mistake, one of the most important indicators in my opinion. but it is just one indicator and it just shows based on one set of criteria.

But anyways, using a combination, this allows you to analyze positions. You can look at the RSI and say ok, this isn't perfect I Get that But I'm going to go ahead and rank the upward potential I'm going to go ahead and rank the direction and I'm also going to go ahead and rank the price strengths over the short-term SMA line and I'm going to see if it makes sense to take a position even though the RSI isn't showing exactly what I want it to be. and if that outweighs the RSI then you take a position. If it doesn't then you don't take a position.

But let's go into a few more examples so that we can really beat this in. So looking at Lab View, we can see that it is overbought on the RSI. But look, we have a consistent uptrend and price strength over or long-term SMA. That means we are looking at a position that not only has a strong upper direction because of this massive amount of real estate, but also has a strong uptrend in terms of actual price strength.

Putting this together, we can see that although we are in the overbought territory, these two odds could be seen as overriding the odds of being overbought. Do I Love taking positions that are overbought? No, our most longer-term momentum plays overbought on the RSI. A lot of them are, so it's sort of like distinguishing between momentum plays and discounting physicians. These tools really allow you to distinguish between the two and kind of rank the opportunities as they present themselves to you when taking it a step further and looking a little bit more into it.

If you open up the longer-term chart, the RSI is closer to fair value. So the point of this is that yes, it is important to get a good deal intraday, but it's all about a balance. If we have clear price strength and a clear uptrend, it may not be a good deal in terms of the RSI. But in this case, the combination of all these factors as well as the strong price strength turn this play into a momentum position.

and this is sort of what I mean by finding balance. As we know, finding oversold discounted positions is a great way to go about making money in the market, but so is finding great Momentum plays and Momentum plays that are a good deal on the RSI long-term can often be extremely lucrative in the short term even though they're not as good of a deal in the short term. And last but not least, making sure to identify and confirm reversals is extremely important for weeding out times when the play is no longer relevant. You'll notice Ford and plenty of stocks provide clear uptrend and downtrend direction, but then can't make up their mind for the rest of the day.

The minute that you see is confirmation back and forth over the long term. SMA Line That's when you know it's time to look for different tickers. So anyways, I Hope this video was helpful for you. If you have any questions, do not hesitate to comment below or reach out to us on the Zipp Traders Circle Facebook group.

We also of course have a trading tutorials playlist that we put together for you guys. If you go through the list, you could work through each of the steps of learning how to be a trader, but of course at the end of the day your success is going to be determined by how much effort you put into it and the discipline that you bring to the market. Anyways, have a great day folks and I'll see you in the next video.