There are dozens of technical analysis indicators and so-called chart patterns that stocks make.
However, very few are near and dear to my heart.
I’ve made the reversal patterns my bread and butter.
Every night I dream about reversals…
…when I’m at the grocery store, I walk down the same aisle twice just to create a reversal pattern.
And you know what else?
This pattern came up clutch last week… it held up… despite all the panic and market volatility.
Heck, it helped Jeff M. score some handsome profits:
Now, I can’t let Jeff have all the fun here… so I’m going to walk you through how I spot potential reversals. And how you can use the pattern to profit on future trades. As well as, the three keys to successful reversal trading.
I don’t care who you are or how long you’ve been trading. If you work with reversal patterns, you need to have a support or resistance level.
Over the years, I’ve read countless books that describe the perfect head and shoulders pattern…the best engulfing candles.
That’s all fine and dandy. I promise you they won’t work overtime without support or resistance.
Let me explain why.
Chart patterns visually describe market behavior. Candlesticks…indicators…they all try to describe what’s going on. Traders use them to predict the future.
Without a support or resistance level for reference…you’re trading blind.
Imagine watching someone back up their car in a parking garage with their windows blacked out. They’d shuffle back and forth, trying to inch their way around the car. Eventually, they’d put the car into reverse one last time and make it around the car.
That’s what it’s like using a reversal pattern without support or resistance. Just like each shuffle of the car, every reversal pattern looks like it will work. But, it won’t finally take hold until you have a support or resistance level to work with.
That’s why every morning I put out support and resistance levels at the bottom of my emails.
Let’s go back to that car in the parking garage. What if I told you that they were out of gas and running on fumes? Would you expect them to make it around the car next to them?
The broader market context creates the environment for a trade to work. Hurricanes hit the U.S. East Coast during the summer months. Why? Because the season makes the conditions ideal.
Try working a long call option reversal pattern when the Dow opens up down 400 points. Might be a little tough to get that one to work out.
My day starts well before the market opens. In my daily market videos, I go over what I see around the world. Each market, each data point tells a story. I start to get a sense of things as I weave my way through the markets.
Yet, knowing where we are isn’t enough. I want to understand where we’ve been. How we came to our current position is just as important.
Back in December, markets completely crashed before staging an amazing rally. January saw stocks move up six days in a row. We got a one-day pullback.
If I were bullish the next day, do you think I’d expect the market to move up 500 points? Probably not. The market had already run up a ton. Even if I was bullish, I’d be wary of a retracement.
Looking at it from this angle, I’d keep my targets close. The probabilities don’t say we’ll get another rip from there.
Know your stops
I’ll go out on a limb and say it’s impossible to have a reversal pattern setup without a well-defined stop. A pattern, by definition, has a start and a stop.
And yet I see so many people get into trades without one.
Here’s the easiest way to come up with a stop.
Make a box around your pattern. The bottom of that box is your stop (or top if you’re short). You can stop out if price breaches that level or closes below. It doesn’t matter. But that’s your stop.
I chose this chart completely at random. Say we decided that the area in the box is a triangle pattern.
You decide you want to take a long trade. Put your stop as a close below the bottom line. That’s it. It doesn’t have to be more complicated.
It’s normal to feel overwhelmed.
Take each piece one at a time. Sit with it until you feel comfortable. Then move onto the next step. Pretty soon, you’ll be flipping options like these guys.