Introduction
Welcome to Part Four of our “Phases of Price” series! In this guide, we’ll break down one of the most powerful concepts in trading: reversals.
Understanding how reversals form, and how to trade them, can help you anticipate market shifts and enter with precision. If you haven’t yet reviewed the earlier parts of this series, especially our lesson on price expansion, start there first to build a strong foundation.
What Is a Reversal in Trading?
A reversal happens when expansion is met with expansion in the opposite direction.
Unlike a continuation, where price expands, retraces, and then resumes in the same direction, a reversal signals a full change in market trend. Price drives strongly one way, only to be met with aggressive expansion in the other direction.
This shift in trend is what makes reversals such high-value trading opportunities.
Key Areas Where Price Reversals Form
Reversals don’t form randomly. They occur at specific price levels where liquidity is resting:
• Previous highs and lows – Prior day or prior week levels are among the most reliable reversal levels.
• Significant swing highs or swing lows – Structural points where price has previously pivoted.
Pro Tip: Focus on relevant levels (previous day’s high/low, weekly highs/lows, session highs/lows) rather than arbitrary points. These levels repeatedly act as magnets for price and create high-probability reversal conditions.
How to Identify a Reversal: Step-by-Step
When price approaches one of these levels, look for the following signs to confirm a reversal:
Expansion Met with Expansion
A strong move in one direction is immediately followed by an equally strong or stronger move in the opposite direction.
Higher Time Frame Wick
On the higher time frames, reversals often appear as long rejection wicks, evidence of a sharp rejection at a key level.
V-Shaped Reversals
The cleanest reversals form sharp “V” patterns, where price sweeps a level and snaps back aggressively closing through the same level swept out.
Change in State of Delivery (CISD)
A shift in how price moves, momentum and order flow flipping, confirmed by the closure through the series of candles that made the high (bearish reversal) or low (bullish reversal).
Candle Closure Confirmation
Wait for a candle to close before committing. This added confirmation helps avoid false reversals that turn into simple retracements. Focus on a closure back through the key level.
Liquidity Sweeps
The best reversals often take out old highs or lows, trapping breakout traders before price sharply reverses.
How to Trade Price Reversals
Follow this structured approach to catching reversal or the continuation that follows.
Start on Higher Time Frames – Identify major highs and lows where reversals are likely to form.
Drop to Lower Time Frames – As price reaches those levels, look for reversal signatures such as expansion met with expansion or V-shaped moves.
Wait for a Protected Swing or Candle Closure – This confirmation is an entry for a reversal trader.
Trade the Continuation After the Reversal – Once confirmed, look for a retracement or consolidation to join the move in the new direction.
Example: If price sweeps the previous day’s high and immediately shows strong downward expansion, look for an entry to trade lower targeting the next liquidity pool.
💡 Pro Tip: Focus on Previous Day Equilibrium as an area to see reversals formed off previous day high or previous day low trade to.
How Reversals Fit Into the Phases of Price
Reversals are only one phase of the market. They work in combination with the other phases of price:
• Expansion → Reversal → Retracement → Continuation
A confirmed reversal can lead to a clean continuation or a small retracement before price continues.
Higher timeframe closures can further validate reversal setups and refine your trade timing.
By combining these phases, you develop a complete framework for anticipating price behavior rather than reacting to it.
Key Takeaways for Trading Reversals
• A reversal occurs when expansion is met with expansion in the opposite direction.
• Target high-probability levels like previous day/week highs or lows.
• Watch for reversal signatures: higher time frame wicks, liquidity sweeps, and V-shaped moves.
• Confirm with candle closures and watch the continuation that follows.
• Blend reversals with the other phases of price for the strongest trade setups.
By mastering reversals, you position yourself to catch the market’s most powerful shifts. In the next part of this series, we’ll connect the dots between reversals, retracements, consolidations, and daily closures to create a complete trading roadmap.
