Forex Markets Fall Prey To Reversals

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Let's examine a market that is not correlated to stocks, such as the euro currency, to see how this market phenomenon known as a trend reversal occurs. Keep in mind that the markets are a reflection of the cumulative total (or sum) of market participants' perceived value of a given product at a given time. We went over the fact of how massive the spot forex market's liquidity is; not a single entity can manipulate prices. Something or some event must drive traders' opinions of the markets. One such event is a news or economic report, which can change people's opinions on a given market's value.

As we look at the euro currency chart in Figure 2.9, we see the market develop into an uptrend, then consolidate, and then, bang, on the drop of a dime, drastically reverse. This is the kind of trading environment in which traders can and do make lots and lots of money. If you know what to look for and if you understand once a market goes from trend to consolidation, you should be aware that the next possible outcome might not be a trend continuation but rather a complete trend reversal. Then you have a better chance of not fighting against the current of the market, otherwise known as the tape.


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