Forex Trading 2018- TA/FA- Setups and discussion, page-50

Hi Rick, in answer to your question (why trade reversals rather than follow a trend) I think there is no black & white dividing line between trading a reversal and a trend - its a question of shades of grey where the shades are levels or degrees of confirmation of a reversal that initiates a new trend.

I will give you an example of the spike retest setup I just posted a couple of setups for today (today's EJ setup is shown on the chart below - the 3rd occurrence of the same setup in the run-up since the Dec 15 low.

The spike retest is basically just a retest of a low. It requires that the low be a spike low, and that after the spike low there must be at least one bar with a higher close, and then any bar with a lower close becomes the spike low retest (if entry at high not hit the following bar can also be a spike low retest - up to a max of 5 bars from the spike low - all without breaking the low of the spike low).

The rationale for the above setup is that a spike low marks a short term low (the fact that makes it a spike is that the next bar must have a higher low). Requiring at least one higher close represents buyers controlling at least one bar to push the price to a higher close, and at least one lower close represents sellers succeeding in an effort to push the price to a lower close, but unsuccessful in breaking the spike low. A subsequent break of the high of the spike retest bar indicates sellers have lost that control to buyers who have succeeded in regaining control and pushing price to a new higher high.

Essentially it provides a higher high, higher low and 2nd higher high, but purely on price action, nothing else. Note that in the current run on the EJ there are 3 occurrences of this setup, the 3rd occurring today. Both the 1st & 2nd occurrences provided good positive returns (for example, at the close of 2nd bar after setup).




Conversely if waiting for say a EMA crossover (10 over 30, for example) and a pullback after the crossover before entering, then essentially you are adding more levels of confirmation, but at the cost of a later entry and further away from the original low/turning point - example same chart but with EMA overlay below:



Price may well continue higher for several hundred pips, but in that time there are reversal setups at the beginning of the trend (the 1st low) and along the way (the 2nd & 3rd & possibly more entries) that provide good entry points.

Of course the risk/reward has to be determined by back-testing but the reward being proportional to risk on these setups is probably similar to the risk/reward on hundreds of pips for a larger structure such as the type you use.

Cheers, Sharks