Reversal Trading

Reversal trading bets that the current swing is ending. A long reversal buys after a decline. A short reversal sells after a rally. It is the highest-discretion family in technical trading and the easiest to confuse with "it has gone too far." A reversal is not a feeling about distance. It is a failed continuation: a sweep of a low that cannot stay outside, a completed climax into a major level, a break of the minor structure that had been pushing the trend, at a place where a larger level already existed. Without the place, a reversal pattern is a candle. Without the failure, a level is just a line price may slice through.

Require both a location and a trigger. The location is a higher-timeframe level, a weekly low, a value area, a major swing. The trigger is evidence on the traded timeframe that the push has failed, a reclaim, a break of the last minor swing in the trend, a climax bar followed by a hold. Enter after the trigger, not at the level in anticipation. The stop goes beyond the extreme. If that makes the size too small, skip the reversal. The first target should be near, the other side of the climax, a mean, a VWAP, because reversals often only retrace part of the swing. Holding a countertrend trade for a new trend is a different, larger bet. Take the partial first.

Trade fewer reversals than continuations, and only at levels you marked before the climax. Use them to catch the turn of a range and the exhaustion of a blow-off, not to pick the daily top of a bull market because an oscillator is high. After the reversal pays the first target, move the stop and let the remainder prove that a real change of structure is underway. If it cannot break the next swing, you had a scalp against the trend, which is a win, and you should not donate it back waiting for a collapse that the chart has not started.

Shorting a strong trend at a round number with no failure. Also buying the first green bar of a selloff. And calling a pullback entry a reversal so that a losing fade looks like it belonged to the trend system. Name the direction relative to the higher timeframe. If you are against it, you are reversing, and the journal should say so.

Reversals have a low win rate if you enter early and a late entry if you wait for proof. There is no version that is both early and confirmed. The ones that work look brilliant in hindsight because the extreme is obvious after the turn. Most attempts to catch that extreme are just early. Cap the number of reversal attempts per day. A market that tempts you five times is a market that is trending.