Although it is not labeled as such, the chart below is a 10-minute chart of the S&P mini’s for Wednesday, September 5, 2012. Late in the day the market had a sell-off over a 20- to 30-minute period. Then, at the point marked “1.”, we see a black inside candle (an inside candle is one where the entire range of the candle is inside the range of the previous candle). Then we see higher lows and higher highs as the market carefully tests the reversal up, briefly dips back into the range, then climbs consistently up again.
Professional traders know not to arbitrarily jump in front of a trending market – that’s a great way to get slaughtered. The reason is simple: you never know how far the market will move before it reverses. It’s a lot like jumping on the train tracks and hoping the train stops before you get run over. Wait until the market shows it has stopped, then enter your position.
The correct way to play most reversals is to let the market show you the move is over. How? By watching the move stop, and then go sideways for a time before moving up again. That’s what the big players do – they have to (they are risking a lot more than we are).
The right place to enter a buy is the third candle after the candle marked “1”. The first two candles following the candle marked “1” show a possible end to the downward trend – meaning selling strength is over for the time being. But as the market climbs above the 140200 area where momentum has shifted, we get a new uptrend, by definition: higher highs and higher lows. And as confirmation, we have already seen an entry signal in our stochastics indicator. Also, the low was established and has not been broken for 20-30 minutes.
By buying at this point, you could risk 150-200 (6-8 ticks) to make 200-400 (8-16 ticks), not the best risk-to-reward ratio, but not bad for a trade with good odds for success.
Many Profitable Returns,
Trader Gregg
Mr. Killpack has been studying the markets since 1988. He has read over 40,000 pages about trading and investing strategies, fundamental and technical analysis, and related topics. He began day trading in 2001.
TopstepTrader http://www.topsteptrader.com seeks to find and develop undiscovered trading talent from around the world. While in our program, those who display a strong trading skill and aptitude will be backed as a fully-funded trader.