Reversal Trading. Reversal phase-1:mrtq13

Reversal phase/trading is the most baffling and perhaps the most profitable phase in a stock's movement..........This could give us huge profit if timely entered. Again,this could give us loses,if wrongly entered..............

Recently,I am working on Reversal trading style. I think this is the most interesting phase of a stock,as it is the recovery phase..........

Believe it-every stock goes down,and that stock will oneday go up................

We need to find out stocks that have gone through heavy correction and now trading in a Flat manner. Or,that it is showing that it is trying to move up.................

Following criteria can be applied to such trading strategy.............

1. The stock must go through heavy correction-big fall..............
2. The stock must show signs of stopping its fall.This is the trickiest part.
3. The stock will show less change in price movement. For example,a lot of small candles with doji.
4. The volume may dry.Less trading.....................However,some spikes in volume may happen...............

After I started working on Reversal trading,I found three stocks to be tradable a couple of weeks ago,which I mentioned in the Yahoo group..............They are AftabAuto,EHL,Niloycem. I have entered into two of them-Aftab and EHL. Let's see if they met the criteria mentioned above.Both Aftab and EHl had almost same pattern. Let's see what Aftab did....................

As you can see below. Aftab had gone through long correction meeting our first critaria...........Now the second criteria had problem. Aftab had flat trading three time in three months. It broke down three times. What to do in such cases. To avoid entering at wrong time and at wrong pattern,we can use some more criteria at this level. For example,we may see if buying is occuring,which we will see in the next image............Also,note the volume.There is not much movement in volume in this level................So,this is recovery phase. This is bottom trading,the trading that every trader dreams of..........






Now to avoid whipsaw or false entry or bad timing for entry,we can use criteria like these :

1. we need to see buying.
2. we need to see breakout of trendline.
3. we need to see price going above moving averages.
4. we need to see volume..........Though this isn't neccessary at this stage...........

But Aftab showed the first criteria to me. See the image.The white candles are buying candle,backed up by volume. Also,see the breakout line(pink line)is upward. Also,the dotted white line is penetrated by the candles,which is another indication of recovery................




Now above mentioned one is one of the many reversal patterns that I like. The pattern goes like this : Fall>Flat trading>Recovery. There is another pattern like this : Fall>Reversal.............This pattern is a bit amusing. It just puzzles! But for a very quick profit,this pattern is interesting...............!!! There is another reversal pattern that doesn't reverse fully. It is a kind of pullback type thing.But the fall is for a longer time than normal pullback..............

Hopefully,we will have more discussions on this..................

What is most important to note about this type of trading is that we are buying at the lowest price,we are trading at the bottom.This is at least better than buying at the top......................

Trade pattern.Find and trade longer term trend...........That gives you better understanding of things,better view of market.................

If you can use it combining with other charts,you will be amazed to see its power.........I hope you understand I am trying to create system for each different strategy. And this is better than sticking to one single thing..........graph4,graph5 etc are the breakout lines.They are developed following certain days and calculations of days.For example,if the breakout is shorter term,then the lime color line will be broken. If the breakout is longer,then the pink line will be broken...........They also work as support and resistance zone..........You would be surprised to see how many times the stock stops their fall at the support lines(Blue and Bright Green color). So,you don't have to draw the lines manually as the chart already has the line...........You can use the four lines instead of bollinger bands!

Above strategy is a very important one. One should be able to catch such patterns and research them.............Note that this is one of the main four trading styles that I talked about : 1. Pullback. 2. Breakout. 3. Reversal. 4. Rangebound.

And above mentioned pattern is one of the important patterns in Reversal trading styles..................There are other patterns in Reversal trading...........

Four Trading Styles-tutorial!:mrtq13

I always keep my plannings,and ideas documented/written so that I can review, mamorise, modify them whenever I can…………..Below is an important article that I have written recently. It is about different types of trading in TA. I was looking for an arranged situation of Trading. I mean I wanted to know how many styles are there in trading,and which one is better or of what are needed for a specific style. I wanted to know which one suits me better.

This is an important learning for me-a very important one indeed. I have recently come to know about this…………And this small document can be expanded into several parts to describe the styles of trading. And I will be adding new things with this document(for myself) and share it with all……………

Did you ever think how many trading styles are there………? Trading style can be catagorised. We can categorize trading into four parts. I mean, there are four types of basic styles of trading from TA’s point of view. They are :

1. Retracement or Pullback trading.
2. Breakout trading.
3. Reversal trading.
4. Rangbound trading.

Yeap,you can put trading into only these four category. And depending on what type of trading style you are comfortable with,you chose your style and indicators. You setup your indicators according to the style you chose to trade………….

For example, Moving averages are useless for Rangbound trading styles. Only oscillators are effective for such style. DSE at the moment is in Rangbound trading situation. So,we should heavily depend on oscillators to trade stock like Southeast bank,which is not trending, but in Rangbound situations..

Now go on reading following four types of trading. I will discuss them in details later....... :

1. Retracement or Pullback Trading :

This is the most interesting and profitable trading style! Known as Retracement/pullback trading,this style has several different ways or techniques to trade. For example,one can buy on pullback to Moving averages,or pullback to Fibonacci retracement levels,or pullback at support level,or pullback at pivot levels etc……….

2. Breakout trading :

After pullback/retracement trading style, this one is known to be the most profitable trading style. Ah,the breakout style……….I had hard time to trade it. It is quick and nice! There are a lot of breakout in an uptrend of stock. Trendline is the most useful indicator in breakout trading style……….See the image below. In an uptrend,stocks usually don’t go straight up. It takes rest and creates consolidation patterns.After a stock trade in a range or consolidation for a while,it is usually bound to go up from its range or consolidation area resuming its previous uptrend. If we can enter into the stock before it breaks out of its trading range, we can gain quick profit. The great “turtle traders” were breakout traders……………

3. Reversal trading :

This is known to be the lowest profitable and heavily risky trading style. This can be compared to the axiom :” catching a falling knife”. After a stock goes through a long fall ,it somewhere stops and reverses its downtrend and start to go up. This is sudden and many times uncertain. See the reverse of NTC recently. It suddenly reversed its downtrend. There are several reversal patterns like double bottom, falling wedge,V bottom,etc…….See the reversal below

4.Rangbound trading.

This is an interesting style of trading. When a stock trades in consolidation situation or within a specific support and resistance zone,it can give small and quick profits. Oscillators like Macd,Stochastic are very effective to trade in Rangebound style. The plan is we have to buy near to support level and when the oscillator is oversold,and we have to sell and when he oscillator is overbought. Recently,DSE is trading in Rangebound situation. Oscillators are good in such situation…………Intrestingly,Rangbound trading can turn into Breakout trading…………

Break out-1:mrtq13

A breakout is the point at which the market price breaks away or moves out of a trading range or pattern. A breakout is simply a resolution in terms of price. The trend usually continues in the direction of the breakout. If previous trend is up,next trend will be up. If previous trend is down,next trend will be down...............The opposite of breakout is breakdown...............

Some points :

• When a price breaks out of a stable, established range or trend, for whatever reason, the odds are high that it will continue to move in the same direction
• The longer the trend, the greater the potential move
• An upward surge in trading activity, or volume, confirms the validity of the breakout.
• When the volume does not show a significant increase on the upside price breakout, the price pattern/breakout should be questioned. It means breakout should be backed up by high volume..............


Entering breakouts can be dividided into two-

A.entering a position when the stock is in congestion before a breakout.
B.entering a position after the breakout occurs.

Now let's see some examples....................

See the image below of ICBislamic.............In the image,you will see there was an uptrend(white arrow). Then,the price stops to go up. The price started to trade in a specific price range. It didn't go up or down. This is called Trading Range(White box). So,we have got the first uptrend and then trading range..................

Now we know that we have got a buisness. And we know that the price could go up from this level breaking up the trading range. So,what do we do now..........? We draw a trendline above the price range like below,and we know it is 430 taka line..................So,we prepare ourself to get into this stock whenever it goes above 430 taka range with high volume...........

See the last trading image. The price actually went above from that trading range/box breaking the line we drew............Now this is called breakout...........

There are several different types of breakout.What I have shown above is one of the famous ones.................After pullback,breakout is the most traded strategy in TA's world. And it is very famous strategy and a reliable one............The great Turtle traders were breakout traders..............

As you can understand,we could apply two different entry strategy after we detect a breakout is coming...................They are :

A.entering a position when the stock is in congestion/trading range before a breakout occurs.
B.entering a position after the breakout occurs.

You will get a lot of breakout and pullback trading in uptrending stocks......After a stock goes up but you can't enter into it at the bottom,then don't worry. Wait for the stock to come to a pullback or breakout trading. It will come someday...........

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Surely,there are ways to find out breakout automatically.............For example,you can use Breakout Trading System,which will indicate when a breakout has happened. You can set Amibroker in such a way,that the software will scan 300 stocks and find out which stocks have gone through breakout today............Turtle traders used to use Donchian Breakout system. They used 20 days highest high breakout system.

But I think you should also try to find out breakout manually at the beginning of your learning. It is because you need to get your eyes used to catch breakouts..................

Actually,it is all about patterns..........Breakout is also a pattern.And you need to know the patterns,you need to get used to the patterns..............After you get used to breakout patterns,you need to define your own patterns,that you like to trade.You need to have strategy about what you would do or don't do after the pattern appears. And then whenever that patterns appear,you just trade.............!

Highlight phase:mrtq13

Pls,see the image below. I hope the image describes itself................I like to have some discussion on phase of a stock. Stocks go through phase. And we must understand in which phase the stock is in to enter in disciplined way.

You might see a strange thing in the image below.That is the stock below is moving in a calculative manner. If we research,we will see that there are several strategy that can be applied to this stock for entry.............

One could enter at first phase,which is recovery phase. Recovery phase is the most profitable phase of a stock. In this phase,the stock stops its fall and just move sideways.There will be flat base type pattern in this phase. The volume may not be heavy.Just some spike of volume can be seen here..............But the problem is we really don't feel like entering a stock at that phase. It is difficult to enter a stock when it is not moving up.But interestingly,big investors start to enter in this phase.This is their accumulation phase. Only big investors have strength to do that,as they have news in advance.They know that the stock is going to go up soon...........

Then,the stock starts to move up,which is the starting of second phase.Some small traders(especially the experienced,risk takers,informed ones) enter into beginning of the second phase when the stock has just started to move up.These are reversal traders.........Some enters into the middle of the move and just get out soon............These are momentum traders. Both of these groups are skilled traders. These are profit takers,and low in quantity in the market.

But problem occurs with the top,where new traders,inexperienced ones,uninformed ones start to enter. They are late. And they enter just at the top. Because already the stock is in fire,everybody talks about it.There is rumor in the market spread by other traders.So,all want to jump in it. The sentiment rises,and with that the price and volume rise heavily. Now getting a chance to have some lucrative profit,those investors and small traders that entered before everyone start to offload their holdings pushing the price down. This is euphoria or blow out phase. This is a bad entry.We should always try to avoid this phase...............

Then comes the pullback................Big traders already sold much of their holding to small traders at the euphoria phase.Now there is no manipulation by big traders.They are not holding the stock.The supply is high.Small traders hold on to their stock in lose.Some panic,and start to sell. Now if the selling is hard at this level,then the stock will go to reversal. But if the selling is not hard enough,or the stock is still in demand,the stock will go to pullback only..........This is another entry point............

Now there will be another entry point in the stock after the pullback.And technically that would be the last entry in this stock!!!!!! However,sometimes the stock may have several breakout and pullback. See Bracbank's one year trading..............

If you go through the data/charts of all stocks,you may find stocks usually go through such phases. And whether a stock will go to pullback or reversal situation,none can say unless there is indication of it.............

Now think why huge volume at the top is bad indication.................Because a lot of transaction is occuring. And usually,big traders are selling to the small traders there.............And usually,after tht euphoria phase,stocks lose momentum.............

Now why should we know where the stock is in at the moment! Because we need to be disciplined......................

Now how do we enter the stocks. We develop some criteria to enter the stock at each phase. We will work on each phase and find the best possible entry...............

Now if we have some pre defined entry strategy or patterns,we will have some advantage over the market. And one of them is discipline..............Because then,we will know what we will do under certain situations..................

QUICK-TRADE: mrtq13 (31-10-2008)

I am thinking about the longer term trend now. Just last night,I observed that DSE has changed its trend. Now it is in strong downtrend(from longer term range). So,our strategy should change. If we trade in short term range,we should be quick to trade-be it about profit taking or about lose taking.............You see,last trend of Aug to Oct was a short one. You can say,it was one month trend. Now,we have to look for the new another newtrend,which may also be another one month trend or even two months. But we must not expect the new uptrend to last more than a year,as we are in downtrend in long term trend. So,I hope TAs are understanding that strategy should be changed now. We are in new front,and should adopt new weapons to win the war..............

So,for me,the strategy is simple : go for quick trades. Because long term uptrend is gone..................It doesn't look like DSE has such strength that it will be able to go above 3500 range soon. If it doesn't trade above that range,well,we should be concerned............

Good indicators for such short term situation is : oscillators..............!!!