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Trading Reversals | Episode - 11 | Reversal trading strategies | Price action course — Transcript

by Fortune Talks · 2,890 words · 400 segments · language en · Watch on YouTube

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0:00[Music]
0:18hey guys welcome back
0:21reversal trading can be one of the most
0:23profitable trading strategies you can
0:25use you can trade reversals in trending
0:28markets ranging markets and even against
0:32the trend we have discussed the concept
0:34regarding reversals in the sixth episode
0:37of this price action course do check out
0:40that video to know the basic stuff
0:42regarding how reversals work in this
0:44video however we will talk about the
0:46reversal trading strategies with respect
0:49to price action
0:50reversals refers to large price changes
0:53where the trend changes its direction
0:56altogether but the thing is that when it
0:58starts to occur a reversal isn't
1:00distinguishable from a pullback and the
1:03main difference between them is that a
1:05reversal keeps going and form a new
1:07trend while the pullback ends and then
1:10the price starts moving back in the
1:12trending direction or simply the price
1:14will continue with its previous trend
1:16reversals often occur in indra day
1:19trading and happen rather quickly but
1:21they also occur over days weeks and
1:23years therefore reversals occur on
1:26different time frames which are relevant
1:28to different traders so an intraday
1:31reversal on a 5-minute chart doesn't
1:33matter much to a long-term investor
1:35who's watching for a reversal on the
1:37daily or weekly chart yet the 5 minute
1:40reversal is very important for an indra
1:42day trader so as a reversal trader you
1:45are in essence a counter trend trader
1:48who is trading against the trend or the
1:50current market momentum for example
1:53let's say the market is in an uptrend
1:55making a series of higher highs and
1:57higher loss as a reversal trader you
2:00look to sell in that uptrend or for
2:02example if the market is in a downtrend
2:05and as a reversal trader you are looking
2:07to trade against the trend and the
2:09momentum reversal trading especially the
2:12trend reversal trading can be a
2:14profitable way to trade the markets
2:16however like any other trading strategy
2:19there is a correct way and a wrong way
2:22to trade reversals before we talk about
2:24the current way to do reversal trading
2:26let me first explain how you should not
2:29trade the market reversals or simply
2:31i'll talk about the mistakes that most
2:34traders make while trading reversals the
2:36first and the most important point to
2:39consider is to not catch a falling knife
2:42for those of you who do not know what is
2:45catching a falling knife it means trying
2:48to enter a long position in a market
2:50that is crashing down so let's say the
2:53market is dropping every day you don't
2:55want to blindly enter a trade because
2:58you are a reversal trader looking to buy
3:00low and sell high there is absolutely no
3:03sense in trying to catch a crashing
3:04market similar to a falling knife and
3:07why is it so because if you are buying
3:09into the laws of the market there is no
3:12logical place for you to set your stop
3:14loss there is no support or market
3:17structure you can refer to and there are
3:19no signs that the downtrend could be
3:21ending anytime soon and most importantly
3:24trends need time to reverse their
3:26direction as we have discussed in the
3:28market trends as well as market
3:30structure videos so avoid catching a
3:33falling knife
3:34the second mistake that traders make is
3:36entering the first pullback anticipating
3:39that it will be a reversal now this is a
3:42common mistake that traders make that is
3:44attempting to trade the first pullback
3:47itself this means that you go long when
3:49you see the market rallies after a huge
3:52decline but often this type of a rally
3:55is only a retracement of the existing
3:58trend and why do some traders always do
4:00this this is simply because of the fear
4:03of missing out or former and you don't
4:06want to miss out on the next move thus
4:08you enter a trade as soon as the market
4:11shows any sign of reversal unknowingly
4:13this sign is usually a retracement or a
4:16pullback of the existing trend and the
4:19market will continue the trend causing
4:21you to lose your money now that we have
4:23understood about what not to do during a
4:26reversal trade let us look at how to
4:29approach reversal trades in the market
4:32the first and foremost point is to have
4:35a reference point on your chart now what
4:38exactly is a reference point a reference
4:41point can be a trend a consolidation or
4:44an area of value like a support
4:46resistance a trend line a moving average
4:49etc where there is a chance for some
4:51sort of a price action now after you
4:53have figured out a reference point the
4:56second point is to wait for the market
4:59to reach that particular reference point
5:01now no matter where the price is trading
5:04right now for a price action trader to
5:06make any sort of conclusion with the
5:08prices it has to be in an area where
5:10there is a potential interest from the
5:12side of the market participants or
5:15simply the price should be at an area of
5:18value now the third point to consider is
5:20regarding the trade entry now that the
5:23price has reached an area of value you
5:25have to look for reversal candlestick
5:28patterns you can use reversal
5:30candlestick patterns like engulfing
5:32candles or pin bars to time your trade
5:35entry so you will enter a trade only
5:37after the market shows signs of reversal
5:40however you risk entering at a much
5:42higher price which may lower your risk
5:45to reward ratio but it gives you a
5:48higher win rate now the fourth point is
5:51setting up a proper stop loss when it
5:54comes to stop loss you want to place it
5:56at a level that invalidates your trading
5:58setup this means if your stop loss is
6:01hit then the pattern is broken there is
6:04no reason to stay in the trade any
6:06longer so it is generally a good idea to
6:08keep the stop loss with reference to the
6:10area of value and the highs or loss of
6:13the reversal candlesticks by giving the
6:16ample buffer space to save yourself from
6:18pullbacks the buffer space can be
6:20decided using the atr indicator or with
6:23respect to your risk appetite and the
6:25final point to consider is to set a
6:28conservative profit target now your
6:30exits depend on your goals so what do
6:33you want to accomplish either you can
6:35capture a swing or ride a trend so if
6:38you want to capture a swing then you can
6:40exit the trades before the opposing
6:43pressure comes in for example if you are
6:45long in a market then you want to exit
6:47your trade before the next resistance
6:50level or the swing high where the
6:52sellers can come in and on the other
6:54hand if you want to ride a trend then
6:56you can trail your stop loss as the
6:58market moves in your favor for example
7:01you can trade your stop loss using a 20
7:04moving average
7:05now that we have understood how to
7:07approach a reversal trade i am going to
7:10share with you three techniques which
7:12can help you identify reversal trades in
7:14the market and as a reversal trader you
7:17want to be smart about when you want to
7:19enter your trades so here we go the
7:22first strategy is the break of the
7:24market structure we have talked about
7:26the different stages of market in the
7:28market structure video and we also know
7:31how to identify a particular trend type
7:34from the market strengths video now
7:36think about this in a trending market
7:38let's say an uptrend you know the price
7:40makes a higher high and higher lows and
7:43what do i mean by a break of the market
7:46structure the break of market structure
7:48is the clue that the market is telling
7:51you that it is about to get weaker or
7:53simply it is about to reverse its
7:56direction so in case of an uptrend you
7:58have a break of structure and the price
8:01fails to make a new higher low or a
8:03higher high so this is the first clue or
8:06the first evidence that the market is
8:08about to reverse lower but there is no
8:11100 percentage guarantee that the
8:13reversal will happen but it's an
8:15evidence given to you by the market that
8:17there is a break of structure and there
8:20is a good chance that the price could
8:22potentially reverse lower again looking
8:24at the concept that i just shared with
8:26you for an uptrend to reverse we are
8:29looking for a break of the trend market
8:31structure that is what we are looking
8:33for is a lower high or a lower low which
8:37invalidates the uptrend setup at this
8:40point you have actually got a lower
8:42height and when the price breaks below
8:44the area of support formed by the
8:46previous higher low you will have a
8:48lower low this tells you that this trend
8:51could be weakening and the trend could
8:54eventually reverse now the trend will
8:57not reverse all of a sudden because
8:59markets need enough sellers to bring the
9:01prices down and so most often the market
9:04go into a phase of consolidation where
9:07the price will stay inside a range for
9:09some time and then it will show a trend
9:12reversal when there is an ample selling
9:14pressure available this time when the
9:16price breaks out of the consolidation or
9:19the distribution stage and move lower is
9:22actually the best short trade entry for
9:25a reversal in case of a tighter stop
9:27loss you can keep the stop loss above
9:30the breakout candle high and to be much
9:32safer and to our deep pullbacks you can
9:35even place the stop loss above the
9:37consolidation range the target in this
9:39case will be the nearest support level
9:42now let us consider this in case of a
9:44down trending market again we will apply
9:46the break of market structure concept we
9:49can see that during a downtrend there is
9:52a series of lower highs and lower lows
9:55the break of downtrend structure comes
9:58when the price stops forming the lower
10:00highs and lower loss or simply when you
10:03have a higher high because the price
10:05broke the prior resistance formed by a
10:08lower high or if it formed a higher low
10:12this again should give you a strong clue
10:14that this downtrend could possibly come
10:17to an end and the market could
10:18potentially reverse its direction in
10:21this case also the reversal may not come
10:24quickly instead there can be a
10:26consolidation or an accumulation stage
10:29where the buyers can come in in ample
10:31quantities so as to take the market
10:33higher here also the trade entry would
10:35be when the price breaks above the
10:37accumulation stage and moves higher you
10:40can keep a safer stop-loss below the
10:42consolidation range and the target can
10:45be set as the next nearest resistance
10:48level or simply you can write the trend
10:51until there is again a break-in
10:53structure now there is no such thing as
10:56guarantee in trading or in price action
10:58or in whatsoever so if anyone promises
11:01you guarantees then it's better to stay
11:04far away from them this is why i like to
11:07use words like probably likely possibly
11:10so keep that in mind there is no
11:11guarantee for anything and especially
11:13when it comes to trading now the second
11:16strategy is the higher time frame
11:18reversal structure so in a market it's
11:21very important to pay attention to where
11:23you are in terms of the big picture or
11:25simply you should stay attention to what
11:28the higher time frame is doing this is
11:30where the higher time frame reversal
11:32structure comes in handy in this example
11:35the price apparently breaks above the
11:37swing high and then it collapses lower
11:40below the support level at this point a
11:43lot of unaware traders would have bought
11:46the breakout on the upside only to get
11:49caught on the wrong side and why is that
11:52this is a chart in the four hour time
11:54frame now let's see the same chart on a
11:56higher time frame for example a one day
11:59period on the higher time frame chart it
12:01is evident that most of the traders are
12:04buying the breakout into a previous
12:07support level as shown that could
12:09eventually act as a resistance and thus
12:12it makes a very low probability breakout
12:14trade this means that the traders are
12:17buying into a huge selling pressure and
12:19what do you think will eventually happen
12:22it's pretty much no wonder why the
12:24market reversed from the resistance
12:26level this is what i mean by a higher
12:28time frame reversal structure so what
12:30exactly are we looking at in case of
12:32this strategy we have to look for a
12:35higher time frame area of value like a
12:37support or a resistance where the prices
12:40can eventually reverse and you can then
12:42take a trade entry on a lower time frame
12:45with the help of a reversal candlestick
12:47for confirmation in this case there was
12:50a false breakout and you can leverage
12:52the highs of this false breakout to
12:54place your stop loss now the third
12:56strategy we will be discussing is using
12:59moving averages you can make use of
13:01moving averages for reversal trading in
13:04this particular technique we will use
13:06the longer term moving averages like the
13:08100 moving average or 200 moving average
13:11with a positional trading perspective we
13:14know from the basics that if the price
13:16is above the 200 moving average for
13:18example we should try to stay long and
13:22if the price is below the 200 moving
13:24average try to stay short on the market
13:27now the reason for this is quite simple
13:29if you think about this the 200 period
13:31moving average summarizes the price of
13:34the last 200 candles based on your time
13:37frame so if the price is right now above
13:40the 200 moving average it is telling you
13:42that the price has been trending higher
13:44and similarly if the price is below the
13:47200 moving average it is telling you
13:49that the price has been trending lower
13:51this is a simple way to tell you what's
13:54the long term trend on the particular
13:56chart that you're trading why is it a
13:59long term trend on the particular chart
14:02of your trading it is because you could
14:04be using a 200 moving average on a five
14:07minute time frame that is not really a
14:10long term trend because it's a five
14:11minute time frame right likewise it can
14:14be a 200 moving average on a daily time
14:16frame then that's a pretty long time
14:18frame so it is actually the long term
14:21trend of the chart that you are trading
14:24and depending on what time frame you are
14:26looking at so let's use 200 moving
14:28average and one day time frame for this
14:31particular example over here the price
14:33is above the 200 moving average so from
14:36the basic rule you want to look for long
14:39opportunities in this market we can plot
14:41an area of support and every time the
14:44price comes into the area of support it
14:47forms a price rejection that is
14:49validating your trading setup but the
14:51key point to note here is that the price
14:54is actually forming a consolidation and
14:56it has tested the support level multiple
14:59times and you know what that means from
15:01this symbol concept that we have
15:02discussed about supports and resistances
15:05in episode six and it is exactly what
15:08happened the price broke down the
15:09support level and even moved below the
15:12200 moving average with great momentum
15:15there wasn't any price rejection of any
15:17sort from both these areas of values now
15:20you can have a short bias since the
15:23price is trading below the 200 moving
15:25average and now we can look for
15:27opportunities to go short on the market
15:30now this is how you can actually use the
15:32200 moving average to give you a bias to
15:36know whether you should go long or stay
15:38short and after you have identified your
15:41bias then just reference to a market
15:44structure like a support or a resistance
15:46or even the moving average itself to
15:48kind of identify the area of value that
15:51you want to trade from and sometimes the
15:53price will test the 200 moving average
15:56which is actually an area of resistance
15:58and if it turns out to be a fast
16:00breakout of the highs you can use the
16:02help of reversal candlestick patterns to
16:05take a reversal trade lower anyway the
16:08200 moving average is useful to help you
16:11find out the trend reversals and to
16:13identify the trade on the right side of
16:16the trend now these are some of the
16:17techniques which you can adopt and back
16:19test in the market conditions to check
16:22if they work for you and if it does the
16:24entry and exits can be decided based on
16:27your risk appetite and patience now that
16:30is it for this video guys and if you
16:32have learned something new today please
16:34do like the video and subscribe the
16:36channel for more upcoming video courses
16:38i will see you guys in the next episode
16:41till then see

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