Trading price reversals is one of the most popular ways of trading the currency markets because you can potentially make a lot of money if you call them correctly, particularly on the longer time frames.

However a lot of traders rely on basic indicators to try and call the top or bottom of a market, and the fact is that you cannot just go short on a pair when one of the major indicators is indicating it is overbought (or go long when it is indicating it is oversold) and expect to make money. Unfortunately forex trading is not as easy as this, otherwise we would all be insanely wealthy.

There are, however, a lot more effective ways of trading price reversals, and the two things I like to look out for are as follows:
 
1. Pin Bar Reversals
 
I have been reading a lot about pin bar reversals in recent months (after learning about a forex trader who makes a full time living trading these simple candlestick patterns), and they do tend to work really well.

If you look at a basic candlestick chart (or bar chart), a pin bar is essentially a candle that has a very small body that is in the top or bottom third of the overall candle, if that makes sense. It is distinctive because it has a very long tail and the closing price is very close to the opening price.
 
What it basically tells you is that there was a big price move, but there was no momentum behind the move and the price ended up finishing pretty much where it started.
 
As regards price reversals, you want to be looking for a pin bar that has a long tail that is extending well outside of the recent trading range. This tells you that the prevailing trend seems to be running out of momentum, and is highly likely to reverse in the opposite direction. Here is an example taken from the daily chart of the GBP/USD pair:
 

As you can see, this was a perfect pin bar because the tail extended downwards out of the recent trading range, and then the next candle moved above the highest point of this pin bar. This is where you want to be entering a long position because it acts as additional confirmation that a reversal is taking place.
 
2. Divergence Patterns
 
Oscillating indicators such as RSI, CCI and Stochastics all have their merits, but I don't believe you should simply open long and short positions when these indicators reach overbought or oversold levels.
 
A much better strategy is often to look for divergence patterns on these indicators instead. In other words look for instances where the price is continuing to make new highs (or lows), but the indicators you are using are failing to make new highs (or lows). This tells you that the trend is running out of momentum, and a price reversal is on the cards.

In the same example above, there was also divergence on several indicators including the Smoothed Repulse indicator, Stochastics and MACD, so this was an excellent example of a high probability trade.
 
Indeed talking of the MACD indicator, this is one of the best indicators you can use for spotting divergence patterns in my experience, whether it's the basic indicator or the MACD histogram (or both). However there are lots of other indicators you can use as well.
 
*          *          *          *          *          *

The point is that there are lots of ways you can trade price reversals. You can even use EMA crossovers, which are part of my main 4 hour trading strategy, although these will often get you into a reversal trade a little later than the two methods mentioned above.
 
Looking for pin bars and divergence patterns are arguably my preferred methods of finding reversals in the forex markets, and when you use them together, they can be really powerful.