Click on Chart to Enlarge
I don't usually get into real short-term type set-ups on the blog, but I thought I'd post today about a good way to trade intra day reversal bars (like hammer candlesticks). This method can be applied to all time frames, but the chart above is a 30 min chart of BGZ.
The basic set-up is a reversal bar during a common reversal time during the day. 1:00 to 1:30 ET is a very common intraday reversal time. The reversal bar above is the 12:30 to 1:00 time frame. It is nice to see this accompanied by an oversold stochastics on that time frame as well.
The trigger price that is used as required confirmation of the trade is a tick above the high of the bar prior to the reversal bar. (With experience in recognizing and trading only quality reversal bars, you can exit immediately with no required confirmation, which will help your risk/reward ratio). Then a stop loss is placed a tick below the low of the reversal bar. As an additional loss mitigation strategy, I find that exiting if any following bar closes below the real body of the reversal candle will get you out of failure prone trades with a significantly smaller loss than planned by the stop loss. I have found that the great majority of good trades take off in your direction immediately, so it is just best to have a defined stop, but to use that secondary exit to keep your loss even smaller. That could as much as double your reward to risk ratio over time if you exit with the small loss instead of waiting for the stop to hit. So in this case, you would wait for the 1:00 to 1:30 bar to close before considering that early exit.
While with experience, an indicator based exit may be appropriate for this trade, I think most people would be better of just playing a numbers game with it based off of past chart reading experience. If you are going with the larger trend (200 period MA) then I would go for a 5:1 reward on risk and then exit at that point. If you go against the larger trend, then I would decrease that to 3:1. Those ratios are based off your stop loss point (the low of the reversal bar).
So hopefully some of you more active traders may find this post useful.
Pete
Just a quick comment I wanted to pass along from Sentimentrader.com.
ReplyDeleteyesterday was an <20% up volume day. Today is on par to be an 80% up volume day. When this has occurred with a lower high on the 80% up volume day, the following 2 day returns are only positive about 25% of the time. That is suggestive of downside later this week.
Also, this fits the pattern at recent highs (Jan and Feb 09) where there is a huge down day, then a 1 or two day pause/up day, followed by further weakness in the days ahead.