Trading Price Action Reversals [PDF]

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Trading Price Action Reversals – Book

Any trade with a positive trader’s equation is a mathematically sound trade. For example, if a trader has a 50 percent chance of making $2.00 in AAPL before losing $1.00, the trade has a positive trader’s equation and is a good trade. If the trader has a 60 percent chance of making $1.00 before losing $1.00 or a 40 percent chance of making $3.00 before losing $1.00, it also is a good trade.

These are all trades that experienced traders take every day and make consistent profits by doing so. Among the good trades, there are trades that are especially good because the setup is unusually strong due to a confluence of supporting factors and a strong signal bar, and because the trader’s equation is very positive.

The very best trades have either a 60 to 70 percent chance of making a reward that is at least as large as the risk or a 50 to 60 percent chance of making two or more times the risk. These are the trades that beginners should primarily take because trading is difficult and these trades have the biggest margin for error and offer the best chance of generating profits.

For example, suppose there is a bull trend that has a strong sell-off to well below the moving average, then a wedge-shaped rally to a marginally higher high; the rally has several prominent bear bodies in it, indicating strong selling pressure, and there is a strong bear reversal bar that pokes above a longer-term bear trend line.

Traders shorting below that bear reversal bar probably have about a 70 percent chance of making two to four times their risk. A strong reversal setup comparable to this forms several times a week in every major market, and there are reversals almost every day that are almost as good.