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Hi everyone, I'm a beginner in price action trading, and I have a question about reversal trades.
Reversal trades have a low probability of success, so they require a high reward-to-risk ratio.
This means I should aim for swing trades and hold my positions longer.
However, most of the time, I enter the market based on some top or bottom patterns and minor reversals.
Then, these minor reversals attempt to evolve into major reversals, but they often fail and drop to new lows.
All top and bottom patterns include some form of a trading range. This means that if I place my stop order at a new low, it's the same as selling at the bottom of the trading range, which is a poor strategy.
For bear trend reversal trades, is it correct to place the stop loss at the low point of the bottom pattern? There might be limit buy orders betting that the downward breakout will fail or that the breakout won't create a gap.
Additionally, should I exit with a small profit instead of holding the position until the floating profit turns into a floating loss?
I have watched the section on trading reversals in the AL Brooks course but didn't fully understand the content. Your responses have summarized and connected the relevant knowledge, making it much clearer for me. Thank you for your help
I've just finished videos 21A-D on this subject. My understanding is that reversals usually fail so if taking a reversal trade we have to be aware of that and manage the trade accordingly.
In a broad enough trend we might take a reversal for a scalp, if the trend is too tight it will be difficult to even get that. Sometimes a reversal will yield a swing trade and that's great but it's too easy to keep trying for reversals and end up with many losses which the occasional big win won't cover.
Much better to use reversals as flags that allow us to enter with the main trend when price breaks out of them.
Videos 22A-D cover major trend reversals.
