Guide to Day Trading Strategies

COUNTER TREND (REVERSAL) 
TRADING STRATEGIES
In addition to trading momentum stocks to the upside, I am a big fan of trading reversals. One 
of the 
À
rst things I realized as a new trader was that, it is impossible to predict when a stock is 
going to make a big move to the upside or the downside, but almost all of those moves will result 
in a reversal. Instead of feeling frustrated that I missed a big mover, I saw it as an opportunity 
to trade the reversal. The challenge is 
À
nding the reversal and not getting in a stock going the 
wrong direction too early. Many counter trend traders experience large losses, because they start 
entering reversal positions too soon. Since countertrend trading requires guessing the change in 
trend, it is naturally more dif
À
cult than momentum trading. The big advantage of reversal trading 
is that when you buy a weak stock very close to the bottom, you will have an amazing pro
À
t loss 
ratio. The risk is almost always very low relative to the pro
À
t potential, because your stop is at 
the high of day or low of day. We already learned having a 2:1 pro
À
t loss ratio means you can 
be a pro
À
table trader with just 50% success rate. On reversal trades, I often get 3:1 pro
À
t loss 
ratios. I will have a 10-15 cent stop at the low of day and get 50 cents of pro
À
t off the bounce. 
These types of pro
À
t loss ratios mean even if the accuracy rate is lower, you can afford to take 
more losses since the winners will generally far outweigh the losers.

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R O S S C A M E R O N
96
Counter Trend Trading Chart.
One of the big questions students will ask is, how I’m able to determine if a stock has the 
potential to make a big bounce. I will answer this with an example. Think of a rubber band, 
when the rubber band gets extremely stretched out, it will snap back with tremendous force. 
Applying that concept to trading, we need to look for stocks that are extremely extended to the 
upside or the downside. The biggest mistakes students make is underestimating how extreme 
the extension needs to be.

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