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Reversal Trading Strategies
Reversal Trading Strategies That Make Profits!
Trading reversals may goes against the preferred choice of trading with the trend. Traders are better off by trading with the trend rather than reversal because there are challenges in trading reversals. What are the challenges?
Firstly, reversals are not common and occur less often than stocks that are trending. Secondly, aiming to sell tops or buy bottoms in reversal comes with a high chance of entering a trade on a false high or low. This leads to the last but not least challenge that spotting the bottom or top of a trend reversal may require more precise setups and patience than trading with a trend continuation.
Why trade reversals
As mentioned above, trading reversal can be risky. However, it present to us a very high reward opportunity by entering into a new trend at an early stage. In contrast, trend traders are likely to enter trades at a later stage after the trend is confirmed.
While no one can predict with a high certainty the highest or lowest turning point in a reversal, we can adopt a few strategies to trade reversals with a higher probability of success.
Below are 3 strategies that you may like to add to your trading arsenals. By keeping alert to observe that a reversal has occurred, you can stay ahead of the trading game.
1.Swing Pivot Reversal
In our free price action course, we teach the concept of swing pivot. For this strategy, the first reversal entry goes with the first warning sign that the impending trend is changing.
In an uptrend, you have a higher high and a higher low. What happens, if instead of a higher low, you have a lower low. Correct, there is a possibility of a reversal happening.
When that happens as shown in the above example, you may enter a short trade below the low of the last candle that breaks the last higher low. You may choose a blind entry (without any price action setup) for aggressive traders or wait for a price action sell setup below the last swing pivot low. The stop loss should be placed at the opposite side of the swing pivot.
On the other hand, you can use the same technique to apply to the reversal of a downtrend.
After a series of lower lows and lower highs, we may see a change in the direction with a change in the swing pivot to a higher high. Again, this could be the first sign that a reversal may be coming soon.
When this happens, you may enter a buy trade above the high of the last candle that breaks the last lower high pivot. Similarly, you can use a blind entry to enter as soon as it breaks above the last swing pivot high or wait for a price action buy setup above it. It is important to place your stop loss safety net on the opposite side of the pivot.
Free Reversal Trade Setups
The second reversal trade technique applies to a situation where a clean uptrend or downtrend can be drawn.
As shown below in the downtrend chart, price action breaks above the downtrend line. In many instances when it breaks, many investors who have given up hope on the stock will take the opportunity to sell for fear of it going back lower again. This may cause a pullback from the breakout of the downtrend line.
As price action goes back lower to the breakout point, new buyers who have earlier missed out on the first breakout may step in to buy more shares. If the demand exceed the supply, then price is likely to continue to go higher.
With this reversal, you have a high probability setup to enter a long trade. You can enter a trade with a price action setup taught in our free online course to get in with a high reward to risk trade.
You can use the same technique to apply to the reversal of an uptrend line breakdown.
3.Accumulation / Distribution Breakout
The last strategy to trade a reversal applies to the end of the accumulation / distribution stage in the 4 stages cycle of a stock.
After a downtrend, you can see price actions go lower. It then enters into a prolong stage of consolidation. There are no more lower lows and share prices tend to trade in a range within a rectangle. This is known as the accumulation stage of a stock cycle.
At the end of the accumulation stage, we may sometimes see a wide range bar pops up out of nowhere. This is the first signal that a reversal may be happening. This wide range bar breaks above the high of the range in the accumulation stage . This may be due to a change in the fundamentals as announced in the news, brokers upgrades after improved earnings, etc.
With this breakout, you can enter a buy trade above the high of this wide range bar or wait for a pullback to enter long above the breakout level.
Similarly, you can use the same technique to apply to the reversal of a distribution stage breakdown.
Free Reversal Trade Setups
The above 3 strategies can be used for any time frame chart you are trading, depending on whether you are a day trader, swing trader, position trader or investor.
In summary, trading reversals can be risky but can be very profitable if the entry timing is correct. Reversals in our market will always happen and we cannot ignore them to avoid risk. You can use the above 3 reversals trading entry strategies to help you overcome the challenges in trading reversals.
The trend is your friend, until it ends. When it ends, you can then look for the reversal to trade.
One Good Trade
In the reversal of a downtrend after signs of bottoming, you can buy stocks in the Equity market (EQ).
In the reversal of an uptrend after signs of topping, you can sell stocks in the Contract For Difference market (CFDs). Read More on CFDs.