Trading price reversals is one of the most popular ways of trading the currency markets because you can potentially make a lot of money if you call them correctly, particularly on the longer time frames.
However a lot of traders rely on basic indicators to try and call the top or bottom of a market, and the fact is that you cannot just go short on a pair when one of the major indicators is indicating it is overbought (or go long when it is indicating it is oversold) and expect to make money. Unfortunately forex trading is not as easy as this, otherwise we would all be insanely wealthy.
There are, however, a lot more effective ways of trading price reversals, and the two things I like to look out for are as follows:
1. Pin Bar Reversals
I have been reading a lot about pin bar reversals in recent months (after learning about a forex trader who makes a full time living trading these simple candlestick patterns), and they do tend to work really well.
If you look at a basic candlestick chart (or bar chart), a pin bar is essentially a candle that has a very small body that is in the top or bottom third of the overall candle, if that makes sense. It is distinctive because it has a very long tail and the closing price is very close to the opening price.
What it basically tells you is that there was a big price move, but there was no momentum behind the move and the price ended up finishing pretty much where it started.
As regards price reversals, you want to be looking for a pin bar that has a long tail that is extending well outside of the recent trading range. This tells you that the prevailing trend seems to be running out of momentum, and is highly likely to reverse in the opposite direction. Here is an example taken from the daily chart of the GBP/USD pair: