Reversals Done Right

Key Rules to Catch the Best Reversals

Reversals can be one of the most lucrative strategies but also one of the hardest to pull off.
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But… we can make them easier to trade by adding a few rules.
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Let’s explore.

Reversal Timing

If you can time reversals right, they are a thing of beauty…​

  • The stop has an obvious place
  • You get potential lovely RvR
  • The trade can be structured as a quick scalp or as a full trend change
  • Most of the time you know if you are right immediately (good for the soul!)​

You’ve probably grabbed a few juicy reversals yourself…
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But for most traders, they are always just a bit too early on the entry.
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That desire to get in on the bounce causes a bit of FOMO and every pause, every slight pop is the ‘real’ reversal.
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They get long and it does another leg lower stopping them out.
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Do this enough times and it’s a daily loss lockout, or worse, a tilt trigger. (We’ve all been there.)
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​“It MUST turn now, I have to keep trying”​
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​Now we don’t need to be one of those traders, do we?!
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There are a few golden rules we can use to keep us safe, and focused on grabbing the actual turn rather than guessing.

Golden Rules

​#1 Better to be too late than too early​
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​This is the main rule.
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Too early is a killer…
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Better to even miss these than get in too early and take a hit.
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If in doubt, wait a bit longer, and remind yourself that exhaustion and big moves often go way further than most people expect.
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That’s why they can snap back so hard…everyone’s vomited out the position at lows.
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​#2 Cashflow the trade​
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​Quite often when we get to the end of a reversal we think that’s the low for the entire trend.
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And it may well be.
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But sometimes trading the dead cat bounce is a nice play on its own.
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You can do well just looking for that first counter trend sequence, without having the whole trend reverse.
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So consider cash flowing the trade, peeling a portion off on the first pop, and then holding a runner if you think it has legs.
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Up to you of course, but it’s worth considering.
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​#3 Specify what you need to see [FILTERS]​
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​Be clear about what you need to see to get into the trade.
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Apply some filters that must be met before you’ll consider taking the trade.
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Eg:​

  • A larger-than-normal volume spike
  • Largest range candle of the session
  • A higher high that holds

That kind of thing – anything to help keep you out of the trade until it’s ready.
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BTW: I’m hosting a webinar covering this topic on Tuesday, 3rd September at 6 pm BST (tomorrow!)
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​“Understanding Volatility – Trading Strategy Selection”
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​One of the areas I’m going to focus on is reversal setups during periods of high volatility.
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​Register here if you’d like to join me and explore this in more depth.
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​Paul Tudor Jones once said:
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​“I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and make all the money in the middle, but I think, if you miss the first 10 or 20 percent of a move, you are in trouble.”
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​I reckon reversals are worth mastering…