Best Scenario for Trend Reversals are
1. Macro Downtrend, Micro Range, Intraday uptrend.
I outline the definitions of these terms in many of my posts but essentially the macro is yearly data, the micro is weekly data, and intraday is daily. When we are in a macro bear market the best trades will always be short so when going for trend reversals we must think, What is the best scenario where a long trade will FAIL and create a reversal back to the downside? The answer to this questions lies in the micro chart. If and only if the last 1 to 2 weeks we have been in a ranging micro market then we should expected the tops of the range to act as supply and create the stock to fail and create lower highs. When we have an intraday uptrend (frontside move) like the one in Fig.1 combined with a range like the one in Fig. 2 then we have very very clean trend reversals to the downside. The hardest part of trading trend reversals is that you must hold through some nasty moves sometimes. It takes extreme patience and discipline to get in at the right time and only at that time. If you try to do it early or late you will end up in very sticky scenarios where its hard to hold for a significant move. Entries must be at or near the trendbreak zone (oval area of Fig.1). If entries are taken anywhere else but that zone then the EV of the trade is reduced significantly.
EXAMPLE 1
Fig.1
Quality: A
Fig.2
90d:1h: Micro Range and we enter the top supply. AKA a perfect place to look for trend reversals and to hold for the previous lower high.
- This is a beautiful example of a trend reversal trade that I completely neglected. This is a very clean place to enter and hold for the break of high of day. If this does break high of day from the entry you will lose 5 points. If the trend actually reverses you will gain 10 points minimum. In time if this strategy is perfected or there is a market where it is rewarded then these trades can have partials held for much larger profits. In this specific example we are in a micro range so it is not possible to hold partials into mid range because as we know, it is imperative to avoid the mid range at all costs. If the mid range is traded in any capacity then losses are to be expected and will have very very -EV. If you are able to take this entry at the right spot and to hold for the break down for a lower high then you can get a very nice trade on a day where trading should mostly be avoided.
Aspects that made this trade an A
1. Very clean trend break and retest
- Beautiful reversal in the morning because it is in the mid range at the open. We spike very high and up into the top range which means we should expect a lower high and sellers to take over price. R is 3 which is incredible.
2. Upper eschelon of the range hitting multiple supply zones
3. Macro downtrend, Micro range, Intraday Uptrend
EXAMPLE 2
1. Macro Downtrend, Micro Range, Intraday Downtrend
Quality: D
Fig. 3
1d:2m
fig.4
90d:1h (white arrow is trade entry)
- Perfect example of a trend reversal long setup that is tempting but also very tricky and risky. We have a huge downtrend and once it is broken we have a clean break above the cracked downtrend then a pullback for a perfect entry where R is great but win % is still not too great. This trade later crashed and went lower. For this reason any long trend reversal trade setup is expected to be scalps for maximum 5 points and even then it is unadviseable.
Reasons:
1. trend reversal longs are always awful in a bear market. this 1 reason alone is more than enough to avoid this setup completely unless we just did some wild capitulation low and start rallying insanely hard but even then its very difficult.
2. Macro downtrend, Micro Range, Intraday downtrend. BUT when thinking of going long on trend reversals this is the absolute WORST scenario. If we were perhaps in a Macro uptrend, Micro range, and intraday downtrend, then a long trend reversal would be BEAUTIFUL. but that is not the case and wont be for a very long time most likely.
EXAMPLE 3
1. Macro Downtrend, Micro Uptrend, Intraday Uptrend
Quality: B
Fig 4
30d:30m
Fig 5
1d:2m
- So this is a very tricky trade to take but if it works it can end up being very nice for continuation to the downside. On the intraday timeframe we have a perfect uptrend the entire morning where we make consistent higher highs and higher lows. BUT once that is broken and the trendline (that is touched more than 2 times) is broken then we have a very clean and clear setup for a move to at least vwap. The hardest part about these trades will always be "When do I take profits?" The answer will always vary and in general when you are in a micro uptrend and an intraday uptrend on pretty good volume I think that the target should almost always be pretty tight. Potentially in the future when I am using many more contracts then I can take a partial and hold for the much bigger move but for now since I can only trade with one contract I need to make sure I dont get too greedy. Although, I took this trade and sold for only 40 cents on SPY or 4 points on Futures. I think that is a tad bit too conservative. Anyday where I can get a full point in the SPY on any trade is going to be a pretty good day. A half point is considered a base hit green day and anything over 15 points should be considered a home run trading day. I am working my way up to those levels but for now I am very stuck in the 5 point range. Taking this trade is still very tricky from the micro uptrend that we are in but once we breakout of a serious range like this i think its not a bad idea to expect a pullback to top range.
