Recognizing a Reversal

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.

 

Tags: $TRW, $ALV

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 Blog