Trend-Reversal Entry Strategies*

Market Wise Trading School Breakfast of Champions

December 10, 1999 William R. Prebble, Ph.D.
*Robert Miners Dynamic Trader 1997

Trend-Reversal Entry Strategies

The Purpose of Technical Analysis Is to Identify Markets That Are in a Position to Allow a Trade With Relatively Low Risk and Acceptable Capital Exposure. Loss Control or Identifying the Protective Stop-loss Level Is the Most Important Factor in Trading. The Same Methodology That Governs Your Trade Opportunity Should Provide the Exact Market Activity That Voids That Opportunity. Your Stop-loss Level Must Always Be Determined Before a Trade Entry Is Initiated. If the Market Activity Does Not Allow Entry Within Your Acceptable Capital Exposure, Then Dont Enter the Trade.

Trend-Reversal Entry Strategies

Three Reversal Patterns
Reversal Day (RD) Signal Day (SD) Snap - Back Reversal Day

These Reversal Patterns Are Designed to Buy at or Near the Bottom and Sell at or Near the Tops

Trend-Reversal Entry Strategies

(cont.)

These Daily Reversal Signals Are Only Valid As Trend Reversal Signals When the Technical Analysis Indicates the Market Is in a Position for Trend Reversal. These Daily Reversal Signals Frequently Occur in a Trending Market, but Will Not Result in Reversal Unless the Market Is in a Time and Price Position for a Reversal. For Most Markets, One of These Signals Will Occur at 70%-80% of Trend Reversals of All Degrees.

Reversal Day (RD) Entry Signal

A reversal day top is made when a market makes a new daily high but closes below the prior days close and the current days open. KRD

RD

New High
Lower Open & Close Below Open.

Lower Close

OSKRD OSRD

Signal Day (SD) Entry Signal

Open above the prior days close followed by a new high. The open must be in the top 1/3 and close in bottom 1/3 of the daily range. The close does not have to be below the prior days close, only the current days close. The initial protective stop-loss is placed one tick above the signal day high. GSD Gap Signal Day (GSD) is a very strong daily reversal signal.
SD The close does not have to be below the prior days close. Gap left at the close of the day.

Gap

Snap-Back Reversal Day (SBRD) Entry Signal

This is a two-day reversal signal. Day 1: New high and open in the lower 1/3 of the daily range and close in the upper 1/3. Day 2: Open in the upper 1/3 of the daily range and close in the lower 1/3. The two days may be in any position to each other. The initial protective stop-loss is placed one tick above he higher high of the two days.

Reversal-Confirmation Day Signal (RCD)

A Trend reversal is suspected, but one of the three trendreversal patterns was not present. Sell on the close if the close is below the current days open and prior days close. For a more reliable signal add the qualifier that the low of entry day must exceed the prior days low. RCD

RCD + new daily low

Trend-Reversal Summary
These Trend-reversal Entry Strategies Only Work at True Trend-reversal -- Not for Trend Continuation. If One of These Daily Reversal Signals Does Not Occur Then Dont Take the Trade or Use Another Entry Technique Such As Reversal-confirmation Day (RCD) Entry Signal. Remember to Maximize Profits - Only Take High Probability Trades.

Charles Schwab
Snap-Back Reversal Day

Trend-Continuation Entry Strategies

Inside-Day Trade Set-Ups Outside-Day Trade Set-Ups Gann Pull Back Trade Set-Up

Inside-Day Trade Set-Ups

As long as the low of the day prior to the inside-day has not been exceeded, buy the break above the high of the day prior to the inside-day. Place the initial protective sell-stop one tick below the lower of the inside-day or entry-day low.
Buy-Stop to Enter Protective Sell-Stop Buy Stop

Trend Up

Protective SellStop lower of inside-day or entry-day low.

Trend Up

Outside-Day Trade Set-Ups

If the market has first exceeded the prior days low, buy the break above the prior days high. Place the protective sell stop one tick below the low of the entry day, Exit the trade on the close if the close is below the current days open and the prior days close. Buy-Stop to Enter Buy Stop Protective Sell-Stop Exit on Close
Trend Up Trend Up

Outside-Day Plus Entry Set-Ups

Only trade in the direction of the trend. For an up trend, place a buy-stop one tick above the high of the outside-day. Maintain the buy-stop until the price range of the outside day is exceeded. Place the initial protective sell-stop one tick below the low of the outside-day. Buy-Stop to Enter Buy Stop Protective Sell-Stop

Trend Up Trend Up

PSS

Every market makes a top or bottom on some exact mathematical point in proportion to some previous move.
W. D. Gann

Gann Pull Back Trade Set-Up

If the market has made at least a three day counter-trend, on the next day sell one tick below the prior days low. Place the initial protective buy-stop one tick above the high traded for the correction.
Trend Down Three higher highs. Set-up conditions to sell complete. Sell-stop to enter one tick below the prior days low. PBS Sell Stop to Enter

Place the protective buy-stop (PBS) one tick above the higher of the entryday high or prior days high.
PBS

Exit on close if the close is above the entry day open and the prior day close.

Sell Stop to Enter Sell Stop to Enter

All market analysis and trading strategies are a matter of probabilities. Losses are inevitable and a cost of doing business. The trading plan must provide a stop-loss approach that minimizes losses when they occur.
Robert C. Miner

Protective Stop-Loss Placement

The Protective Stop-loss Should Be Kept Relatively Far
From the Current Market Position Until the Trend Is Confirmed.

The Protective Stop-loss Should Be Brought Relatively

Close to the Market When the Trend Is Scheduled to End.

As Trend Continues, Traders Must Have a Plan to Adjust

Protective Stops to Either Reduce the Capital Exposure for a Loss or Protect Unrealized Profits.

If a Market Approaches a Set-up Indicating a High

Probability That the Trend Is Terminating, the Protective Stop-loss Should Be Brought Very Close to the Current Market Position.

Protective Stop-Loss Placement

Swing Stop-Loss Three-Day Low or High (3DL or H) Adjusting PSL to the 2DL and 1DL

Three-Day Low or High (3DL or H)

The lowest price of the three days from the extreme high, inclusive of the high. Inside days are not counted.
1

Figure 1
3

Figure 2
3

3DL (inside-day not counted)

3DL 3 1 2

Figure 3
2 3 a b

Figure 4

3DL 3DL (inside-days not counted)