How To Spot A True Reversal

How To Spot A True Reversal 

• Look for the Possible Swing Candle

This is the 3rd candle in the 5 candle Pattern. A Swing High = 1candle. Higher with 2 candles lower on each side. A Swing Low = 1 candle Lower with 2 candles higher on each side.

       

• Look for Consolidation at a Fib Level

Consolidation is 2 or more candles in a given area

• Look for Reversal Candle (RC) Pattern and Break

- Pin Bars 
- Inside Bar
- 2 Bars Reversal
- Failure Swing Top / Bottom
- Reversed Pivot Top / Bottom
- Naked Reversal
- CPR (Closing Price Reversal)

• Last Swing will be between 30-60 pips if No News is Attached

• Slow Stochastics (SS) Agreement

12:00 – 2:00 Angle for a Long
4:00 – 6:00 Angle for a Short

If a trader is doing the above correctly, the trader should be winning more than they are losing.To be more consistent in picking winning trades, there are Other Factors that require a Live Mentor.
Proper Trend Identification, Time of Day, Session being traded, News, Daily Range, and Recovery Strategies, are all techniques that you will first need to understand. 

There is no substitute for face time and continued practice, once these techniques and strategies are understood, a mentor can greatly reduce a traders learning curve.

       
       

Closing Price Reversal

A closing price reversal is one of the easiest patterns to spot. Price makes a new high/low but gets pushed back strongly and reverses, closing beyond the previous candle’s close.

In the chart below, of the EURUSD H4 chart, I indicated all CPR’s with an arrow.

If you traded in the direction of the overall trend, you would have made some nice money, as you can see. But even when taking ALL trade setups, out of 9, 7 setups would have reached at least 1:1, following the trading and money management techniques.

Just to show you these patterns work on all timeframes, take a look at the EURUSD 5M chart.

I bet you like what you see….. If you now understand you really don't need a whole lot of fancy flashing indicators in order to make an INSANE amount of money in the market, the goal of this strategy has been reached.

Naked Reversal

A naked reversal is based on nothing more than a trend line break.
It is a 2-step technique:

You first want to draw in a proper trend line. To do so, let me give you a proper definition:

UPWARD TRENDLINE:
From the lowest low to the highest low before the highest high, without cutting through any candle bodies.

DOWNWARD TRENDLINE:
From the highest high to the lowest high before the lowest low, without cutting through any candle bodies.

Also, you would want price action to touch your trend line at least twice, preferably 3 times, in order for it to be a valid trend line.
Once your trend line is on your chart, you wait for a candle to BREAK through that trend line. When this break occurs, you will look at the last candle high, higher than the high of the candle that broke through the trend line. That high will be your entry point.

Vice Versa for short.

• Wait for a trend line break to the downside
• Look for the last low, lower than the low of the candle that broke the trend line
• Place a sell order when that low gets broken.

Reversed Pivot Top / Bottom

Pivots are a common pattern used in several trading systems. A pivot bottom shows that price has found a level of support. A pivot top on the other hand shows that price has found a level of resistance.
Let’s have a closer look.

The easiest way of trading pivots is assuming the support/resistance level they indicate will hold, and therefore the prices will reverse.

A common way of trading this would be to enter the trade at the close of the pivot confirmation candle (the third candle of the pivot pattern), with your stop at the pivot high/low.

Let’s have a look at the following EURUSD H1 Chart. It is an average Chart from last week, not cherry picked.

Every Green line represents a trade entry, stop loss would go at the pivot low/high indicated by the arrow. Depending on your money management, out of 15 trades, in the picture below at least 12 trades (I circled the arrows) would turn out to be winners. Not bad for 2 days worth of trading….

2 Bar Reversal

The 2 bar Reversal identifies a possible trend reversal.
The first two bars must trade in the same direction and be trending bars. The third bar reverses the trend direction by taking out the low of the second bar (for short) or the high of the second bar (for long).



The Bearish 2 Bar Reversal

1. Bar 1 has a higher high, higher low and a higher close.
2. Bar 2 has a higher high, higher low and a higher close than bar 1.
3. Bar 3 reverses the trend by trading below the low of bar 2.





The Bullish 2 Bar Reversal

1. Bar 1 has a lower high, lower low and a lower close.
2. Bar 2 has a lower high, lower low and a lower close than bar 1.
3. Bar 3 reverses the trend by trading above the high of bar 2.


How To Trade the 2 Bar reversal
Bullish 2 Bar Reversal:

•  Buy 1 pip above the high of bar 2
•  Place your stop loss at the low of the breakout bar 3.
• 
  

Bearish 2 Bar Reversal:

•  Sell 1 pip below the low of bar 2
•  Place the stop loss at the high of bar 3.

Below is a EURUSD Daily chart. It is obvious this system has the possibility to get you into swing trades at the best possible level.

Conventional Trend Line

A conventional trend line is also known as a common sense trend line. The conventional
trend line consists of 3 types of lines mainly.

- Long Term Trend Line (BLACK)

The long term trend line is drawn over a longer period of time. Due to the higher weightage of

each swing high or low, the long term trend line will usually have more power than the
medium and short term trend line. This means that the price will most probably bounce off
the long term trend line for the first few times before it can break through it.

- Medium Term Trend Line (BLUE)

The medium term trend line is simply part of the long term trend line. From the last point of
contact of the long term trend line with the price, you can draw a medium term trend line. As
compared with the long term trend line, the medium term trend line passes through lesser
candles and thus has lesser weightage.

- Short Term Trend Line (RED)

The short term trend line is the most recent trend line and you will be using it to trade most of
the time.

Some of you may think that the long term trend line must be drawn from a higher time frame
and short term trend line is drawn on a lower time frame. In fact, all the long to short term
trend lines are drawn on the same chart


The difference between the various types of trend lines lies in the number of candlesticks or
period that the line passes through. For long term trend line, it has to be drawn over a longer
period of time while the short term trend line is usually drawn over a shorter period of time.
As for the period to draw, there is no specific guideline you should follow.


Rules for Conventional Trend Line:

• The Best Trend Line Is One That Connects The Most Swing Highs or Lows
• Once The Support Trend Line Is Broken, It Will Turn Into Resistance Trend Line
• Once The Resistance Trend Line Is Broken, It Will Turn Into Support Trend Line

Steps to Drawing Your 3 Types of Conventional Trend Line:
Step 1: Shrink your selected time frame to a smaller size until you see the start of your current trend.
If the currency pair you are trading is currently in an up trend, you simply have to shrink your chart
until you can see the beginning of the up trend.

Step 2: If you are in a down trend, look for major swing highs and if you are in an up trend, you should
look at the major swing lows. (To draw a strong trend line, you need to have at least 3 points of
contacts which means that you need at least 3 swing highs or lows)

Step 4: Expand your selected time frame and look for major swing high or low after the last point of
contact for the long term trend line.

Step 5: Connect those swing highs and lows that you have found in step 4 and you will get your
medium term trend line

Step 6: Look at your recent candlesticks and draw the necessary trend line and that will be your short
term trend line

Trend Line (Swing Highs and Lows)

What are Trend Lines? A trend line represents a supply and demand among traders. According to Wikipedia, A trend line is a bounding line for the price movement of a security.
A support trend line is drawn by connecting several swing lows and a resistance trend line is
drawn by connecting several swing highs.
Example of Support Trend Line:





A resistance trend line is drawn by connecting several swing highs
Example of Resistance Trend Line:















So first of all, let me go through with you how to locate a swing high and swing low before we
start to draw a trend line.

Swing high is basically an N-shaped formation with several candles on the left and right side
of a single high candle.

Swing low is basically a V-shaped formation with several candles on the left and right side of
a single low candle.














However we are not interested in all swing highs and lows when drawing a trend line, we are only looking out for those that have more weightage as this will produce trend line that is more significant. Below is the level of weightage for each formation

Weak Swing

Medium Swing

Big Swing

Once you have identified all the medium to big swing highs or lows, you can start to plot your
trend line. There are 2 types of trend lines you can draw and we will be going through all of
them in this book. They are

• Conventional Trend Line
• Tom Demark Trend Line

You need to have a good knowledge of these 2 different trend line drawing methods as you will need to combine them to have a better trading experience.

EUR USD Midterm Outlook 22-27 October 2012

Fibonacci Retracement

Fibonacci Retracement

Retracement trading is safer than breakout trading. The main levels to watch are:

38.2%, 50% 61.8% and 78.6% (or 76.4%)

The market will typically retrace after a strong move before continuing. The market won't always hit these levels exactly. For example, price may reverse mid way between 50% and 61.8% sometimes. Price can under shoot or over shoot a Fibonacci level. The 61.8% and 76.4% retracements are very popular levels for the market to retrace to. Watch these levels on the different timescales. It is the best to wait for a confirmation signal at or close to point C before entering a trade. The difficult part about trading Fibonacci retracements is knowing which level will hold.

For a buy, price should rise from a swing low at point A to a swing high at point B and retrace to point C at Fibonacci level. A swing low is a C bar turning point. The low of the middle bar is the lowest point of the swing.

For sell, price should drop from a swing high a point A to a swing low at point B and retrace up to point C. Look for intra day highs and lows, daily highs and lows, 2 day highs and lows and 3-5 day highs and lows, etc:

Candlestick patterns are most reliable near Fibonacci levels and other support and resistance lines. Candlestick are also good for signaling the end of  a retracement.

Double top and double bottoms often appear at Fibonacci levels e.g. 61.8% retracement or the 1.382% extension.

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