Picking tops and bottoms is widely known as a fools way off trrading.. However, we know one trader who successffully does this all off the time.. But is there a simple wayoff getting in early after a turn?
Picking reversals in the market is a highly advanced
way of trading and is really only applicable
to those traders who use more complex
methods of analysis.
However, new traders and investors can still
use what is essentially a pretty straight forward
way of identifying reversals just after
they have occurred. This strategy can be used
on either an intra-day basis or end of day and
can be utilized for quick 3 to 5 bar/day moves
or even longer term changes of trend.
I often use a version of this strategy for exiting
positions when I’m intra-day trading—it wont
get you out at the top or bottom of a move,
but pretty close to it.
If you are looking at a stock that has been in a
downtrend and might put in a decent retracement
move which is tradable, you can look at
using the pivot bar strategy. This works when
a stock has been falling over a number of
days and then you buy the stock when the bar
breaks the high of the lowest day in the sequence.
Here’s an example below.
You can reverse this strategy for a stock that
has been heading higher and then breaks
below the low of the highest bar.
So far so good. You are now in a position
where if you see a stock do this type of reversal,
it has the potential for a good swing trade
if you are looking at a daily chart or a good
intra-day trade. One note, I have found that if
you try this on a 5 minute timeframe, the reversal
signal is too weak and its performance
is not as consistent as with 15/30min or
hourly charts.
Applying this rule, I tend to use this strategy
for exiting intraday positions. For example, if
you imagine that in the diagram on the first
column of this article, I was short; as soon as
the high of that lowest bar is broken, I will
exit my position. It doesn’t get me out right at
the bottom, but often close enough to it for
me to not curse!
Ok, that’s the basics of this principle taken
care of. We know it can be used for end of
day traders looking for a short swing trade of
a few days and also intra-day traders. Now
let’s try and enhance its probability of success
by adding another couple of variables.
One way of doing this is to screen for stocks
that are making new 30 day highs/30 day
lows. If you screen for stocks of this nature
and then the following day they do the reversal
pattern, there’s a greater probability that
you will get several days out of this strategy.
After all, it makes sense that a stock that has
just made new 30 day lows and then breaks
above the high of the lowest day might start
to build a relief rally after all that selling.
You can add yet another variable to the equation.
If on your screen of stocks that are making
new 30 day lows, you see a volume spike,
that could also be a sign of a selling climax.
Selling climaxes come at the end of a wave of
selling and can help justify a reversal.
You may have other criteria you might like to
add to this, but it’s a great starting point.
For intra-day traders, you can apply the same
principles but don’t need to have 30 15 minute
bars of falling or rising prices for your
criteria. In an up-trending stock, look for pullbacks
to Fibonacci levels or key moving averages
and then for the reversal strategy to
confirm the move off that support level. The
same works in a down-trending stock—look
for rallies to Fib levels or moving averages
and then the reversal strategy to confirm the
move.
You can bring a number of factors into play
here to personalize this strategy, but hopefully
you can see how it works for both entries
and exits on different time frames.