How to Identify Mean Reversion VS Complete Reversal

I've received questions regarding how to identify whether its a temporary/ short reversal or a complete reversal during the uncertainty. There are certain things that you should be looking for when you're looking for these two complete different setups.

Mean reversion:
1. Shallow pullbacks - It's a primary indication that big players are simply pausing, wait for a slightly better price to re-enter the market, and people are still interested at the current price point of the asset.
2. Visually healthy - Believe in your intuition, if a trend is healthy, the pullback should be visually healthy too.
3. Tight range compare to the impulse - Compare the pullback to the impulse, if a pullback digests most of the impulse move, take a step back and re-assess whether its a pullback or reversal. A healthy pullback/ consolidation should be tight and short in duration.
4. Respect key levels - If the trend is bullish, the pullback should not cross below and violates a key technical support. If a key support level is being breached, its a sign that buyers' that hold the price above that level has lost their interested or temporarily gone.
5. Easily measured - In a healthy uptrend, entries could be measured using trend-following or momentum indicators (Eg. Emas, MACD, VWAP, trendline, etc.)

Reversal:
1. Sharp pullbacks - Think about the extreme supply & demand. When a market is over-stretched, it shows that people are blindly chasing it disregard of the current price level. Eg, when everyone is so focused on the buying opportunities during a strong uptrend, people tend to overlook any technical resistance or higher timeframe picture. Market then approach a key technical resistance with bunch of buy orders at high price, big players' sell orders are being filled at such a great price, all of a sudden the market just snapped and reverse stopping out retail traders, adding up even more selling pressure.
2. Visually unhealthy - When you notice the bullish candles are relatively weak or choppy during an uptrend, and that's a sign of lack of interest or "out of steam", the opposite party could temporarily step in.
3. Wide range compare to the impulse - The first sign of reversal is a sharp pullback into the opposite direction, digesting the entire impulse creating shock in the market.
4. Failure to re-visit the high/ low - A bullish trend should consists of simple higher lows & highs sequence. If the trend is bullish but you notice that price keeps failing to re-test the high, that's a sign of buyers' weakness.
5. Violate key levels - If the trend is bearish, you should expect key resistance zone to hold. If there's a sudden momentum shift breaching key resistance level, its a sign that buyers has overcome the sellers.

Trade safe.


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