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.