All reversals begin with a Trend Line Break (on how to draw trend lines see this post) or a Trend Channel Line Overshoot (too far too fast) before the actual Reversal happens.
These charts use the Reversal Signal Bars indicator for NinjaTrader® 7/8.
Only trends can reverse, trading ranges have failed breakouts.
By implication, you need a strong trend bar before a reversal signal to make it strong. A doji before a reversal signal makes it weak (because a doji is a trading range and its breakout will probably fail, giving a little reversal bar and its breakout on the other side probably will also fail).
Types of Reversals
- Examples for Higher Low Major Trend Reversal
- Examples for Lower Low Major Trend Reversal
- Examples for Higher High Major Trend Reversal
- Examples for Lower High Major Trend Reversal
Location
- Trend Line, Trend Channel Line (overshoot)
- Previous Highs or Lows
- High of Yesterday or Low of Yesterday
Pattern
- after a two-legged move
- after three pushes, creating a Wedge pattern
- Double Top or Bottom
- not in tight TR, Barb Wire, overlap or against logical support or resistance
Strengtheners
- third push
- trend line break
- obnoxious/second Trend Channel Line Overshoot
- is the setup mid range or better at the extremes
Weakeners
- not enough bars on the “other” side of the trend line (might be a sign for weakness of the counter trend traders)
- if trend move is too strong (e.g. 4 or more bars down for a bull reversal) wait for 2nd entry
- the reversal signal bar occurs in a tight trading range, Barb Wire or is heavily overlapped
- if risk is too large wait for a 1st pullback (1P) after a trend attempt off of the reversal
- wait for trapped traders from the old trend
- the Reversal Signal Bar is too small – counter trend traders look weak
- the Reversal Signal Bar is too large – it can become a trading range (more sellers above then buyers and vice versa)
Confluence
Have at least two reasons to take a trade. Read more here:
Look for confluence, when trading a reversal
Reversal Signal Bars and Patterns
A Reversal Signal can be a single candlestick or a pattern that signals a trader that a possible reversal is likely setting up. Sometimes a Signal Bar can be a setup for a trade in either direction.
Read more here: Signal Bars & Patterns
How to enter on a Reversal Signal
There are several ways how to enter a trade on a reversal signal. All have advantages and disadvantages and finally depend on the market context and the trader.
Read more here: Reversal Signal Entry Strategies
How to Trade – Reversal Signals
Once a Reversal Signal shows up on the chart place a stop entry buy order one tick above the bar or pattern (for bull). The closest logical stop goes below the bar or pattern – a bar/pattern stop.
Read more here: How to Trade a Reversal Signal
Please read also:
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