Reversals are perhaps the most challenging part of trading. Most traders find it difficult to get into positions at the right time, and as such, they tend to get in too early or sell too late, thereby, incurring huge losses. This situation is particularly prevalent when attempting to catch reversals and, as a result, less likely results in the infamous “catching a falling knife.” However, imagine if there existed a straightforward four-step equation that could guide you on the best places to enter trades, taking away the uncertainty.
In this article, we’ll reveal a trading strategy using real-time data to pinpoint reversal points with precision. You’ll learn how to use data-driven tools and insights that legendary traders like Warren Buffett have utilized to be greedy when others are fearful. With this strategy, you’ll no longer need to guess when to enter or exit trades.
The secret to finding perfect reversals lies in understanding and analyzing key indicators that reflect market sentiment and positioning. By following a structured, four-step approach and using tools that provide real-time market data, you’ll be able to spot profitable entry points and avoid falling into traps. Let’s break down the steps to find these ideal trade points.
4 Steps to Identify Crypto and Stock Reversals
Step 1: Identifying Opportunity Zones with ChainExposed
The initial step to follow in the process is to utilize ChainExposed, a data-driven tool that employs real-time crypto information in making it easier for you to determine the best trading zones. Through this tool, you will gain insight into the unrealized profit/loss of traders within the market.
- Go to the unrealized profit/loss area of ChainExposed and choose relative unrealized profit.
- This will show you colored zones on your chart which are green and red.
- The green zone indicates regions where most traders are presently in a loss.
- The red zone indicates regions where most traders are in a net profit.
- The secret to reversals is seeing that price naturally goes away from these zones:
- When price touches the green zone, where most traders are in a loss, it tends to go up.
- When price touches the red zone, where most traders are in profit, it tends to go down.
These areas serve as great pointers for buying and selling signals. Buy when price crosses the green area and sell when it crosses the red area.
Step 2: Supply and Profit/Loss Chart
The second tool to improve your trading strategy is the Supply and Profit/Loss chart. This chart indicates the percentage of market players who are in profit at any point in time.
Move your cursor across the chart, and it will display the current percentage of traders in profit.
As the price moves higher, more traders enter profit territory, and as it moves lower, fewer traders remain in profit.
When the percentage of profitable traders is less than 50%, it indicates a potential buying opportunity because the market is in a more fearful condition. When the percentage is higher up to nearly 100%, it indicates greed within the market, usually a sign that it’s time to sell.
This chart enables you to make decisions that are informed by current market mood, and assist you in determining when to sell high and buy low.
Step 3: The N-U-P-L (Nipple) Chart
The N-U-P-L (or the “nipple” chart, as we affectionately call it) is another essential tool in reversal identification. This chart displays three very important lines:
- The black line is the price.
- The red line follows long-term holders.
- The orange line indicates both short-term and long-term holders.
- The zero line (horizontal black line) is the indicator for identifying when the majority of traders are in loss grounds.
When the orange and red lines both cross below the zero line, it means most traders (both long-term and short-term) are in a loss. This is usually a signal that there will be a reversal, and price can expect to increase shortly.
This chart has been extremely reliable in forecasting reversals, and price has tended to spike upward when these lines dip below zero.
Step 4: Entry with the 200 EMA
Lastly, we refer to the 200 EMA (Exponential Moving Average) to further refine our entries. The 200 EMA is widely considered an excellent trend indicator, and here it assists you in identifying the perfect times to buy.
- In TradingView, create the 200 EMA by entering “ema” in the search bar for indicators.
- Modify the EMA length to 200 and change its color to orange.
- Put your chart on a higher timeframe, the weekly chart.
If the price touches or goes below the 200 EMA, it means that there is a possible buying signal, particularly when it is used together with other points such as the unrealized profit/loss zones and supply and profit/loss charts. Such setups are uncommon but are in accordance with the rule that Warren Buffett said famously: “Be fearful when others are greedy. Be greedy when others are fearful.”
Why This Strategy Works
In the last decade, employing this very same strategy would have earned you a whopping 18,202% return. This translates to the fact that if you had begun with a mere $10,000, you would have gained $1.8 million. This strategy is effective because it utilizes exact, data-driven tools that provide you with a clear advantage in identifying reversals and evading the pitfalls that most traders are prone to.
Conclusion
The key to profitable trading is identifying the ideal reversal points, and with this four-step formula, you can make trades with confidence without guessing. With live data and strong trading tools such as ChainExposed, Supply and Profit/Loss charts, and the 200 EMA, you can sync your trades with the sentiment of the market and drive your profits.
Remember: “Be fearful when others are greedy. Be greedy when others are fearful.” By following this strategy and waiting for the right moments, you’ll drastically increase your chances of success.