Tuesday, May 8, 2012
Definitive signs of successful reversal
Most reversals fail and every pullback is simply a failed reversal. b3, b10,b14 all had a decent chance of reversing the down move but failed. b22 finally succeeded but taking every reversal hoping to catch "the one" is a terrible way to trade. After a couple of failures (b3 and b10), its simpler to assume every reversal attempt would be a failure and trade with the prior trend and stop when the market proves you wrong.
Using this approach, you have flipped your odds from many failures followed by one success to many successes followed by one failure. And if the trend line is obviously broken before a signal sets up (b30) you can choose to not trade in the old direction any more and look for signs of a definitive reversal.
A bear move is definitively reversed once the market has put in 2 higher highs (b29, 51) and two higher lows (b43, b58). At this point there is a good chance that bulls and bears both agree that the tide has turned and enter in the new direction.
A higher low is always better than trying to capture the exact reversal, since you will eventually see a two legged pullback in the new direction. You may have missed b22, but you could get in above b43 for just a few more ticks. Or you could wait for a 2L pb to the ema (b59), which is likely to give a stronger move.