How to use 3 types of analysis tools to identify trend reversal points

Why Is It Important to Find Price Reversal Points

Identifying reversal points is a dream for many investors and traders because this zone offers the most optimal price during a trading cycle. If the reversal point occurs in an uptrend, investors have the opportunity to sell at the highest price. Conversely, if the reversal point occurs in a downtrend, investors can buy at the lowest price.

However, estimating reversal points solely through fundamental analysis, news, or visual predictions carries high risk. Trading experts often use technical analysis tools (Technical Indicators) to more accurately estimate trend reversals.

Choosing the Right Analytical Tools

When selecting analysis tools to identify reversal points, investors often choose Momentum indicators that signal Overbought (excessive buying) or Oversold (excessive selling) conditions.

However, directly using Momentum indicators can often lead to errors, especially in strong trending markets. Overbought or Oversold signals may occur repeatedly. A safer approach is to observe Divergence (discrepancy) between the price and the momentum of the indicator.

3 Main Analytical Tools to Detect Reversal Points

1. Using OBV Divergence to Measure Trading Volume

OBV (On Balance Volume) combines volume data and closing prices (green/red candlesticks) to measure changes in buying and selling volume.

• Rising OBV indicates accumulation (more buying volume than selling volume)
• Falling OBV indicates distribution (more selling volume than buying volume)

Bearish Divergence Signal in an Uptrend

Observe when the price makes new highs but OBV trends downward. This suggests that while prices are rising, there is gradual selling. This rally is unstable and may reverse into a downtrend.

Bullish Divergence Signal in a Downtrend

Observe when the price makes new lows but OBV trends upward. This indicates that while prices are falling, there is gradual buying. This decline is unstable and may reverse into an uptrend.

2. MACD Divergence and Measuring Price Momentum

MACD is a tool that indicates both momentum and trend by using the difference between the MACD Line and the Signal Line (Histogram) to measure driving force.

Trend signals:

• MACD crossing above zero line = beginning of an uptrend
• MACD crossing below zero line = beginning of a downtrend

Momentum signals:

• Histogram positive and high = strong bullish momentum
• Histogram positive but decreasing = weakening bullish momentum
• Histogram negative and low = strong bearish momentum
• Histogram negative but increasing = weakening bearish momentum

Bearish Divergence Signal in an Uptrend

When the price makes a new high but the Histogram (momentum) shows a lower high than before, it indicates weakening driving force. This signals that the current rally may not be sustainable and could reverse into a downtrend.

Bullish Divergence Signal in a Downtrend

When the price makes a new low but the Histogram shows a higher low than before, it indicates weakening downward momentum. This suggests the current decline may not be sustainable and could reverse into an uptrend.

3. RSI Divergence to Measure Buying/Selling Strength

RSI (Relative Strength Index) calculates a value between 0-100 and is widely used.

Basic RSI interpretation:

• RSI above 70 = Overbought (excessive buying)
• RSI below 30 = Oversold (excessive selling)

However, in strong trending markets, RSI can remain overbought or oversold for extended periods. A safer approach is to observe Divergence.

Bearish Divergence in an Uptrend

When the price makes a new high but RSI cannot reach a new high, e.g., the price peaks above 70 then corrects and rebounds but RSI does not reach the previous high, this is a Bearish Divergence indicating weakening upward momentum.

Bullish Divergence in a Downtrend

When the price makes a new low but RSI cannot reach a new low, e.g., the price bottoms below 30 then rebounds but RSI does not reach the previous low, this is a Bullish Divergence indicating weakening downward momentum.

Combining These Tools for Better Decision-Making

Although each indicator has its own benefits, combining them provides more reliable signals:

• Start by checking OBV Divergence to assess volume strength
• Confirm with MACD Divergence to measure price momentum
• Summarize with RSI Divergence to evaluate the strength of buy/sell signals

Beyond these three indicators, investors can also incorporate other indicators with similar calculation methods (momentum or volume). Observing discrepancies between price and indicators can be a powerful technique for real-market trading and can improve decision accuracy.