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Outside Reversal



Definition

Outside reversal is a price chart pattern in investing that occurs when an asset’s high and low prices for the day exceed the high and low prices of the previous day. It is also known as a bullish or bearish engulfing pattern. It can indicate a change in market trend and provide a trading signal to investors.

Phonetic

The phonetic pronunciation of “Outside Reversal” is: /ˈaʊtˌsaɪd rɪˈvɝːsəl/

Key Takeaways

  1. Definition: An Outside Reversal is a price chart pattern in technical analysis, associated with the top or a bottom of a price trend. It’s characterized by a security’s high and low prices for a single period surpassing the high and low prices of the previous trading session.
  2. Usage: Traders often utilize Outside Reversals to signal potential short-term trend changes, following either bullish (upward trend) or bearish (downward trend) movements. They often plan trade entry and exit points based on this pattern.
  3. Risk Management: It’s crucial to use Outside Reversal in combination with other technical analysis tools and indicators for effective risk management. It isn’t always completely accurate, and sometimes it may lead to false signals. Therefore, it should ideally be utilized as part of a broader trading strategy.

Importance

An Outside Reversal is a significant concept in the field of business/finance, specifically in technical analysis related to trading in the stock market. It’s important because it’s a price chart pattern that can indicate a potential turning point in the market trend, giving investors and traders a signal for strategic decision-making. An Outside Reversal happens when a security’s high and low prices for a day exceed the high and low of the previous day, followed by a close at a level that’s different from the open, thus ‘reversing’ the trend. Understanding and recognizing this pattern can help traders and investors to maximize profits and minimize potential losses, by advising when to buy, hold, or sell a particular security. It, therefore, plays a crucial role in successful market predictions and trading strategies.

Explanation

An outside reversal is a critical pricing pattern observed in financial markets such as commodities, equities, or forex trading. Its primary purpose is to signify potential shifts in market trends, giving investors or traders key insights into the market’s direction. This reversal can be a powerful tool for market prediction because it identifies potential tops and bottoms in a market, providing traders with vital information that can influence their investment strategies. It can serve as an important indicator for technical analysis, where understanding price movements and patterns is critical in forecasting future price trends.The use of an outside reversal can be particularly helpful in signaling the ideal time to enter or exit a trade, hence optimizing profitability while minimizing losses. For instance, if the reversal pattern indicates an upcoming downturn in a previously bullish market, traders can make informed decisions to sell off their stocks to avoid incurring losses. Similarly, if the pattern is suggesting an upcoming rise in a previously bearish market, traders can position themselves to buy before prices hike. Thus, understanding outside reversals can be a valuable tool in an investor’s resource kit.

Examples

An Outside Reversal, also known as a key reversal, is a chart pattern in technical analysis where a security’s high and low prices for a day surpass those of the previous day, often indicating a potential change in market direction. Here are three real world examples:1. **Apple Inc. (AAPL) in 2020**: In June 2020, Apple’s stock demonstrated an outside reversal pattern. After reaching an a high of $354.77, higher than the previous day’s high of $351.06, the stock ended the trading session at $349.72, lower than the previous day’s low of $350.58. This indicated a potential bearish reversal, and indeed, the stock price dipped in the subsequent days.2. **Gold Prices in 2011**: One of the most prominent examples of an outside reversal occurred in the gold market in 2011. After consistently reaching new highs throughout the year, Gold prices hit a high of $1,917.90 an ounce in August, surpassing the previous day’s high, followed by a sharp fall, breaking the previous day’s low. This marked the start of a long-term decline.3. **JP Morgan Chase & Co. (JPM) in 2016**: In June 2016, the shares of JPMorgan Chase indicated an outside reversal. The stock reached an intraday high of $65.93 and a low of $64.26, both extending beyond the prior day’s trading range. The stock ended up closing lower, signaling a bearish outside reversal. Subsequently, the stock retreated during the rest of the month.

Frequently Asked Questions(FAQ)

What is an Outside Reversal?

An Outside Reversal, also known as a key reversal, is a chart pattern in technical analysis which indicates a potential change in the current trend of a stock, commodity, or index. This is signified when the price exceeds both the high and low of the previous day.

How is an Outside Reversal pattern identified?

An outside reversal pattern is identified in a price chart when the trading range of a certain period (e.g., an hour, a day, or a week) fully engulfs the trading range of the preceding period.

What does an Outside Reversal suggest about market trends?

An Outside Reversal generally suggests a potential shift in market trends. If it happens after an uptrend, it indicates a probable downward movement. If it appears after a downtrend, it indicates a possible upward movement.

Does an Outside Reversal guarantee a change in trend?

No, an Outside Reversal doesn’t guarantee a change in price direction. It’s merely a signal that suggests a possible trend change. As with all patterns in technical analysis, it should be used in conjunction with other indicators.

Can Outside Reversals be observed in all types of markets?

Yes, Outside Reversals can be seen in all types of markets, including forex, commodities, and stock markets. They are typically used by traders to identify potential investment opportunities.

How can a trader use the Outside Reversal pattern in decision making?

The Outside Reversal pattern can signal to traders to possibly enter or exit trades. For example, if this pattern occurs at the end of an uptrend, a trader may consider selling or shorting. On the other hand, if it happens at the end of a downtrend, the trader may consider buying.

Is the Outside Reversal a short-term or long-term indicator?

The Outside Reversal is typically seen as a short-term indicator as it involves examining price movements within short periods. However, it can also have implications for long-term trend direction, particularly when observed in weekly or monthly price charts.

Related Finance Terms

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