Reversal Trading Pattern
The ZoneTraderPro Reversal trading pattern is a low risk high reward trade. In a typical reversal a trend trade will trade to the opposing intermediate zone and the market will reverse.
The example below is the perfect setup into a reversal trade. The TICK strategy and the web site statistics from the web site will make the trade setup a low risk trade. The TICK strategy for this trade starts at the blue counter trend zone that has a TICK of -401.
The next important point of this setup comes from the web site statistics. If there is a 4 tick adverse excursion from a failed trend trade, there is less than a 9% chance the trend trade will succeed. Five ticks have less than a 6% chance, and 6 ticks or more have less than a 4% chance of success. In this example the trend trade has 4 ticks of adverse excursion and the TICK is making a higher high at 403.
The market trades to the green intermediate support zone, where the Reversal trade is indicated, the risk is 4 ticks, and the statistics indicate that in about 9% of the time, this stop will be hit. The stop was only 4 ticks. The TICK has made a higher low of -343. The green background indicates the Euro-dollar classification system became bullish for stocks.
Another very common pattern, and very profitable pattern, is the reversal trade that follows an Exhaustion pattern. Because an Exhaustion pattern normally marks a market top or market bottom, this trade is a test of the top or bottom.
In the eSignal example below, we first have the Exhaustion pattern marking the high. Any Trend trade that follows an Exhaustion trade is, by definition, a High Risk Trend trade (a high risk trend is automatically filtered in the NinjaTrader version), and that is identified on the chart below. The high risk trend trade has 5 ticks of adverse excursion. Your stop would have been 4-5 ticks away, and your profit target over 2 points away. Then a third short trade is good for an additional 2 points of profit. In all 3 of these trades you had no adverse excursion.