To precisely enter successful reversals we need to maintain a very strict trading criteria in order to benefit the most out of our reversal trades.
Questions we need to ask before entering a strong reversal:
- Who is in control of price?
- Have we reached a strong area of Support/Resistance?
- What is the telling us?
- Is the trade worth the risk?
- Is there confirmation?
The Answers For This Example :
+ The Bulls are in control of price - We have seen from the beginning of the New Year, the Australian Dollar increase in strength in the last few weeks.
+ We have reached a strong Monthly S/R zone which price has had difficulty in the past breaking through.
+ formed an Indecision candle after testing the ZONE twice. This tells us the momentum of the Bulls have significantly slowed down and we could see the Bears take control of the market.
+ Our risk to reward ratio is 5:1. We maintain a tight stop loss with reversals as the markets are not in our favour. We want to be out of this trade as soon as possible if the trade goes against us. Mitigate our losses, maximise our profits.
+ WE WAIT for confirmation. The highest reason why traders lose out on beautiful reversals is they do not wait for confirmation, or they miss the confirmation. Confirmation is very important and can determine the difference between a winning trade and a losing one.
The confirmation we wait for is a CLOSED red candle. As we are on the 12hr timeframe. We will wait 12 hours for the candle to close. If a candle forms we will enter this trade as it gives us confirmation that the Bears have taken control of the market.