Trend reversal
What tells traders that a run of gains has ended, rather than merely paused?
In plain words
A trend reversal is a change in the direction prices have been moving over a period of weeks or months: a sustained rise gives way to sustained falls, or the reverse. It is a shift in the underlying direction, not just one bad day inside an ongoing uptrend.
Why it matters
Risk carried in the direction of the old trend works against its holder after a reversal. Size, stops and leverage calibrated to the rising phase can all be wrong once the direction changes, which is why traders look for several signs at once rather than one large down day.
In a real week: ETH, week of 22 February 2021
In the week of 22 February 2021, ETH opened at 1933.54 and closed at 1419.18, down 26.6%, after three of the four preceding weeks rose by 22.79%, 11.73% and 7.42%. The worst day was Tuesday 2021-02-23 at -11.23%, with a largest single-hour move of -8.9% at 08:00 UTC. The low of 1293.18 came on Sunday 2021-02-28 at 15:00 UTC, and the close sat at 19.6% of the week's range, near the bottom. Volume of 16.37 billion was 1.52 times the prior twelve-week average, and the weekly return ranked in the 3.0 percentile of 158 weeks of history.
A common mistake
Calling any single large down week a reversal. One week can be a pause inside an intact uptrend; the decline's depth, its volume, where the week closes and what follows all matter.