Recognizing a Reversal
- Posted by TheArmoTrader
- on July 10th, 2011
Reversals are one my favorite patterns to trade. They are low risk and can provide good opportunities. I particularly like reversals to the long side. For some reason I nail these ones better than reversals to the short side (maybe it has something to do with the overall market?). During a reversal, you are literally risking pennies or dimes to make a quarters, half-dollars and dollars. The risk is limited and usually pretty defined. If it is not, I do not take the trade.
On Friday, TRW Automotive Holdings Corp. was very weak. I think the weakness had something to do with Autoliv’s warning on their earnings. Since this is not the stock directly impacted by the news, a reversal seemed pretty probable to me. I even tweeted about it during @smbcapital ‘s ‘Live From the Trading Floor’ Stocktwits TV show.
$TRW- TRW Automotive Holdings Corp. 2 minute chart
I missed the best place to get long. Heck I even missed the 2nd best place to get long. But I still was abel to make some scalps later on. The best low risk-high reward place to go long was when $54.65 held (stop at .59). Your theoretical risk here is 6-7 cents. Your minimum reward was easily presented when the stock hit over $55.00. Your second best place to get long was actually right there, at $55.00 on the break of the whole # and falling trend-line. Your risk here was a little greater at 10-12 cents but the reward again was still met when the stock hit around $55.60. However, I missed both these. But I didn’t let it effect me. I still wanted to partake in the reversal. At a little after 1pm I saw that $55.50 was holding. So I got long. I scalped this one out. I was risking pennies and I made around ~35 cents (nothing great I know, but r/r-wise it was solid). Later in the day I saw it hold 55.50 again. So I got long again. I scalped this one out again for an average of 25 cents (nothing great again but my risk was literally 2-5 pennies). My reward was easily met.
For me, in trading its all about finding great risk/reward setups. If you think you can risk 1 penny to make 5, then that for me is a great risk-reward trade. However, I look for bigger moves. I want to risk 6 cents to make at least ~30. In both my trades (and the missed ones), the r/r ratios where easily met. Recognize this reversal pattern as it might occur a lot during earnings season.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Jerry Khachoyan is currently an undergraduate student at UCLA pursuing a degree in Political Science. He started trading in September of 2008. He concentrates on using technical analysis and reading the tape to enter the best risk/reward trades. The stock market to him is one of the greatest inventions by man.
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