Reversals

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

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

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

 

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