Reversals are something I rarely discuss because I do not trade them much. They are however a large part of my method so I will explain them here. Trading reversals is simpler than you might think. All you are doing is using candle patterns such as LWP’s and S+R or Scalp lines togather.
What Reversals Look like
So far in this book I have explained how you can take line break trades based on S+R lines and I have also gone over some important reversal patterns. We already know that a S+R line is a barrier at which the price is going to have trouble breaking through. We also know that LWP’s and GP’s indicate possible reversals. If you look at the chart below you can see highlighted a S+R line and an LWP forming on top of it. This is what you should be looking for to enter a reversal trade, it really is that simple!
This next example is slightly different but it still counts as a reversal trade. If you traded the line break on this one it would not have worked out and that happens trades do fail. However now that an LWP has formed on the line you can trade the reversal and hopefully make some pips back.
When an LWP forms on, near or past a line it indicates that the line is strong and that the price can not sustain itself at that level. This is a very clear indication that the price will probably reverse.
Trading A Reversal
Now that you know what too look for you need to know how to trade it, this is the harder part. You will first spot this pattern after the reversal candle closes. It will probably look a little something like this. You have the LWP’s preceeding trend, the LWP’s reversal and the S+R line.
At this point you should be thinking that a reversal is probably coming. You could enter here but personally I find it a little too risky. I like to find the closest applicable line or place one and use that as my entry. If there is a scalp line near by you can use that as your entry level otherwise you will need to place a temporary line. There is no exact distance I do this all by eye. In the example above there is no scalp level so I need to place a line at the nearest applicable level. As far as I can see the best level to place it at would be the low that formed two candles prior two the reversal candle.
As you can see there is now a temporary line. This line play absolutely no significance 99% of the time. It is only important when entering a reversal. This is because I like to see it break something no matter how insignificant to confirm it is an actual reversal. I know it sounds a little crazy but this is the safest way I have found so far.
So now the only thing left to do is wait for that line to be broken and enter the trade. I target 60 pips on the full position on a trade like this one. As for the entry itself you should be looking it at the same way you would a S+R line.
