Reversals: Video 21 A, B, C & D Flashcards
Define a Reversal:
A Change from one type of market behavior to another.
A Bull or Bear trend doesn’t often go into the opposite without entering a trading range
All Tails are Reversals
Define Minor Trend Reversal
Bull reversal in bear trend usually becomes a bear flag or part of a trading range.
A major reversal requires more bars.
It means the market goes from a bear trend to a bull trend.
Sometimes a trading range can contain a Minor Reversal
Video 21A: 10:00in.
Minor reversals usually lead to…
Trading Ranges and Flags, bit not opposite Trend
Al uses the word “Minor reversal” instead of “Noise. Because nothing is random.
Everything takes place because of logical trades by computers.
Noise cannot exist.
He’s calling these small pullbacks Minor Reversals
Whenever people talk about noise, they are either too ignorant to know what the market is doing, or are simply choosing to ignore what it is doing.
5 bars is not enough to lead to a Major Trend Reversal
Assume every reversal is minor until one is strong enough to BO below the Trend Line and last 10 or more bars.
A reversal is a type of Breakout
Every bear trend bar is a breakout and bear climax.
Every bull trend bar is a breakout and bull climax.
All reversals begin with at least a small breakout
Give Up Bar
Since every trend is in a channel, the reversal breaks out of that channel.
A Bear trend is in a bear channel and las Lower Highs and Lows
To reverse tp a Bull Trend, need breakout above bear channel and series of higher.
Once there is a breakout above a bear channel, bulls look for a reversal up from a Higher Low.
In the photo there is a bull rally with two legs up. Bulls buy reversal up from Higher Low, hoping it’s the first of many higher lows and start of Bull Trend
Here’s an example of a failed bear flag.
Bears tried to break out down but kept failing as noted by lower wicks/tails.
In photo, with each bull trend bar, more traders believed trend was now up.
Notice bull breakout above bear flag, further confirmation of reversal.
Another example of Give Up bar.
A Reversal is the earliest entry in a trend.
But the probability is initially low.
There’s always many more Set-ups
Another example of breaking out of a channel for a reversal, then a series of Lower Highs and Lows
Most resistance will fail in a Trend
All Trends end at resistance, so it is important to always keep looking and drawing lines.
Here, there are two ways to draw a wedge.
Also look for Measured Moves
Same with Trends, a bear Trend has inertia and most support will fail
This selloff continues to break below support.
Some examples in the photo are: Double Bottom, Major Higher Low failure. Wedge Bottom at the bull breakout point. 50% pullback of entire bull trend.
Bulls keep trying to push up, yet market keeps falling below every support level.
If the reversal stays in channel and keeps reversing up from above prior higher lows, the reversals are just pullbacks, and the trend continues.
For a Bull Trend to end, you need….
A break below the bottom of the channel and break below the bull trend line.
Need the pullback to fall below a major Higher Low
After this, it becomes either a Trading Range or a Bear Trend
Define 80% Rule in a Trend
80% of Trend Reversal Attempts fail
You can make money selling reversals in a strong bull trend, but it is always only a scalp
Bigger reward comes with ___________
Lower Probability
Accept lower probability of success. 40% success, so most reversal trades fail
The stop is not far, so the reward is much bigger than the risk more than offsets the lower probability.
For a higher probability reversal, wait for a ____________
Breakout
The probability can be 60% if a strong breakout
Whenever there is a Reversal, it will eventually have a Pullback. This creates the _________________ set-up.
Cup and Handle
For a bottom, the reversal is the cup, Pullback is the handle.
It’s also a Higher Low Major Trend reversal
Example of Upside Down Cup and handle
Example of Breakout above a bull flag is reversal of a small bear trend
Bull Flag is a small bear trend.
Here’s another way to look at Cup and handle
Bear Flag is small Bull Trend
What is more likely here? Will this pullback lead to a bull trend, or is it simply a pullback to a breakout
Beginner wants small risk. Sees reversals everywhere. Doesn’t wait for trendline break or selling pressure.
When a wedge like this has three consecutive bull bar closing on their highs, the odds are high that you are going to get at least a second leg up.
If the bear bars in the pullback closed on their lows, then maybe this would be the end of the move.
But with the big tails below the bars, and the bear body being small, the odds are any reversal attempt will lead to a bear flag and lead to at least one more leg up.
For a Trend reversal/Bottom, you need buying pressure. You can get that from two very big trend bars closing on their high as in photo. or 10 smaller bars.
A Minor Reversal can provide Buying Pressure that leads to a Major Reversal
Buying Pressure takes time to build.
2-4 average sized bull bars is not enough Buying Pressure to reverse a Bear Trend.
If not enough Buying Pressure, sideways is more likely than up.
Most likely get a Minor Reversal and Bear Flag or Trading range, not MTR
If a Reversal Lacks Pressure, and _____________ reversal is likely
Minor.
If not enough Selling Pressure, sideways is more likely than down.
Minor reversal and bull flag or TR, not MTR
One sign of Selling Pressure is a significant break below the Bull Trend line
In the example, it came from small bars, but they are many.
In this example, traders look for a failure in the area of the old high, and then a MTR.
Usually the selling pressure comes in the form of a Trading Range. Then bears can form enough selling pressure for a bear trend.
Define Nested Pattern:
A pattern that is a smaller pattern in the final leg within a larger pattern of the same type.
It is usually in the final leg of the bigger pattern.
In example, it’s a smaller wedge within a larger wedge.
A smaller pattern is a big pattern on a smaller time frame. For example, a 1 min chart.
So it’s two or more different time frames trying to do the same thing.
Higher Profitability of a profitable trade.
Here is an example of several layers of Nesting
When there are many ways to draw the same pattern, then trying to reverse at the same price on many time frames, many computers will see the same thing.
If a large number of computers are buying, there is a good chance a reversal will come.
The minimum objective of a reversal is TBTL = Ten Bars, Two Legs in the opposite direction
When Al is trading, he looks at the highest time frame that has the pattern.
Since reversals require some type of test, most are double tops or double bottoms.
Double Top or Bottom are rarely perfect
Expect two legs up from a reversal from the bottom, or one leg from the higher low (2nd leg)
Reversal Down: If Higher High, then expect Lower High and 2nd leg Down.
Most Reversal Patterns: Involve trading Ranges (He said these are all trading ranges)
