Can The Slope Predict Market Reversals?

The Answer to This Question is Hard But not Impossible

The slope is a very interesting concept, and when applied to financial markets, it may deliver some value with regards to market predictions. This article presents a simple trading technique to forecast reversals using the slope.

The Concept of Steepness

The steepness of two or more points is measured by the slope. A greater slope means a steeper line while a lower slope means a flatter line. We can measure the slope in geometry by using a simple formula. Basically, the slope can be found by measuring the ratio of the vertical change to the horizontal change.

In time series, when we are dealing with the slope of two successive points in time, the slope function shortens to just subtracting the last value by the one preceding it. In case we want the slope of a wider interval, say 5 points in time, we have to use the below formula:

For example, consider the following information on the EURUSD:

• Current closing price = 1.2300
• Closing price 5 periods ago = 1.2200
• Time interval selected = 5 periods

We can find that the slope for this period is therefore the change in the closing prices which is 0.0100 divided by 5, giving us a slope of 0.002.

The graph above shows the slope represented by the moving line. Notice how it changes with directional movements on the blue line. Now, we can proceed to applying this concept on a rolling basis.

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