R O S S C A M E R O N
98
The Reversal Bar
The last candle in the series will be our reversal bar. The best reversal bar will be fully outside
the bollinger bands, and should ideally take the form of a doji, a topping or bottoming tail, or a
hammer or inverted hammer. That candlestick becomes our trigger candle that we will use to base
our entry and stop price.
In the case of a top reversal, we will short the
À
rst
À
ve minute candle
to make a new low, versus the low of the trigger candle. Our stop will be the high of the trigger
candle. I have to adjust my size based on the level of risk between my entry and the stop price.
Chart showing
À
ve minute bottom bounce alignment with a daily support level.
H O W T O D A Y T R A D E
99
Alignment with the Daily Chart
Although countertrend trades can be pro
À
table without running into support or resistance on
the daily chart, many of the best reversal setups will have con
À
rmation on the daily chart. The
daily con
À
rmation helps justifying the reversal point, which means more traders will participate
in the reversal trade. As we know from our lesson earlier, more volume
generally means better
resolution. The reversal point on the daily chart can be touching a critical area of support or
resistance, or running into a moving average. The obvious daily levels will typically provide more
support than obscure levels.
Volume
Although volume is not as important on reversals as it is on momentum trades, I still prefer to
see high relative volume. Some of the best reversal trades will experience the highest volume
of
the day on the last candle, before the reversal. When this occurs, it is called a volume top or
a volume bottom. On momentum trades, we need the high volume in order for the breakout to
happen. With reversal trades, if the tide changes
after an extreme sell off, the stock can grind
back up toward the VWAP on lighter volume. As a general rule of thumb, I need to see at least
500,000 in volume on the day, in order to consider a reversal trade. When we trade reversals on
lighter volume, we need to be especially aware of the in
Á
uence of the overall market. When the
overall
market is very weak, a lot of stocks will show up as potential reversal candidates, because
they are selling off in sympathy with the market. If the market does indeed bounce, these stocks
will often bounce nicely, but
if the market keeps selling, it will pull those stocks back down.
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