What is 'Reversal Amount'

Reversal amount describes the level of price movement required to shift a chart to the right. This condition is used on charts that only take into consideration price movement instead of both price and time.

BREAKING DOWN 'Reversal Amount'

In the context of point and figure (P&F) charts, the reversal amount is the number of boxes (an X or an O) required to cause a reversal. A reversal would be represented by a movement to the next column and a change of direction. If you increase the reversal amount, you will remove columns corresponding to less significant trends and make it easier to detect long-term trends. In terms of Kagi charts, it is the amount (generally around 4%) needed to change the direction of the vertical lines.

On a fundamental level, technical analysis is grounded in the quest for spotting market reversals, be they upward or downward movements from the market's current trajectory. Naturally, this is easier said than done. Psychologically, reacting optimally to reversals can be incredibly difficult for even seasoned technical analysis strategist and traders. In many ways, this is because, in the early stages of an actual reversal, not just one that's perceived, the market still shows many indications of a continued move in the original direction.

Example of Reversal Amount Significance

For example, the market's sharp drop during 2008 was a prime example of a significant downtrend that was difficult to pinpoint the end of. While the lows of March 2009 are easy to identify in hindsight, in the heat of the moment, it was considerably more difficult to purchases equities heading into 2009. Particularly after the market beat up bullish investors in the preceding years. As with most boom and bust cycles, by the time average investors were confident and piled back into equities, much of the recovery was already baked in. This is why spotting an inflection point, and reversal amount (or level) is key to buying low and selling high or selling high and buying low.

RELATED TERMS
  1. Reversal

    A reversal is a change in the direction of a price trend, which ...
  2. Count

    Count is a form of technical analysis that employs point and ...
  3. Reverse Mortgage Initial Principal ...

    Reverse mortgage initial principal limit is the amount of money ...
  4. Proprietary Reverse Mortgage

    A proprietary reverse mortgage is a loan that lets senior homeowners ...
  5. Diamond Top Formation

    A diamond top formation is a technical analysis pattern that ...
  6. Reverse Mortgage Net Principal ...

    Reverse mortgage net principal limit is the amount of money a ...
Related Articles
  1. Personal Finance

    Know the Pros and Cons of Reverse Mortgages

    As with any financial product, there are costs and benefits to reverse mortgages.
  2. Investing

    A Guide to Spotting a Reverse Merger

    A reverse merger is a type of corporate action that can be profitable for investors who know what to look for.
  3. Investing

    Point And Figure Charting Basics

    Learn how to construct and read these price charts designed to highlight entry and exit points for longer-term positions.
  4. IPF - Mortgage

    Reverse Mortgages: How to Find a Good One

    Finding a reverse mortgage generally means using a lender that specializes in them. Here's how to find a reputable one.
  5. IPF - Mortgage

    5 Signs a Reverse Mortgage Is a Bad Idea

    Here are the key situations when you should probably pass on this type of home loan.
  6. Trading

    A Look At Kagi Charts

    This relatively unknown tool could help you find an asset's trend faster.
  7. IPF - Mortgage

    How to Avoid Outliving Your Reverse Mortgage

    Running out of proceeds sooner than you expected to is one of the major risks of taking out a reverse mortgage.
  8. Financial Advisor

    Reverse Mortgages: Has Their Time Arrived?

    The perception of reverse mortgages is changing. They can be an integral part of a carefully crafted retirement plan.
  9. Personal Finance

    Is a Reverse Mortgage Right for You?

    There are pros and cons to consider before taking out a reverse mortgage on your home.
  10. Personal Finance

    The Reverse Mortgage: Lifesaver or Albatross?

    How to decide if a reverse mortgage will help fund your retirement – or undermine it.
RELATED FAQS
  1. How do traders interpret a Dragonfly Doji pattern?

    Read about a rare but significant candlestick chart pattern: the dragonfly doji. Learn what a dragonfly doji says about a ... Read Answer >>
  2. How do I start using technical analysis?

    Technical analysis is a method of analyzing securities by evaluating current and historical price and/or volume activity. ... Read Answer >>
  3. What is the best method of analysis for forex trading?

    Learn more about the types of forex analysis used by currency traders such as charting tools, economic indicators and/or ... Read Answer >>
Trading Center