One Fast Reversal Pattern That Actually Works

Great Way To Swing Trade and Day Trade With Short Term Price Patterns

I'm always on the lookout for simple strategies that my students can apply to day trading with short term price patterns and indicators.

One of the easiest patterns to learn and one of the first ones I teach traders is the U turn strategy.

The reason I call the strategy U turn is because it's a very fast reversal pattern that works wonders with volatile stocks, futures, currencies and commodities.

What Is The U Turn Method

The U Turn pattern is a short 1 day reversal away from the main trend. When the pattern is setting up it looks like the market is suddenly breaking out in the opposite direction from the trend. However, as the day continues the market quickly changes direction and closes back in line with the main trend. You can see in this example how the stock gaps down against the trend and appears to be heading down.

As the day continues buyers come into the market who notice that the stock is substantially lower than its fair value and momentum going in the direction of the trend soon follows.

This is a very short term trade that's designed to take advantage of stocks and other markets that are temporarily out of balance.

You need to move quickly when you see this type of pattern because they don't last very long. Make sure the breakaway gap day closes near the upper 20 percent of the trading day.

You want to make sure that momentum is coming into the market the day before your entry.

You Need One Day Gap Away From The Main Trend And A Close Near The High Of The Day

The next day is entry day and this is the most important time because this strategy moves fast and you want to make sure you don't miss the momentum coming into the market. The entry point is above the high that was made on the signal bar which is the gap down bar.

The best trades get filled at or near the opening bell so you probably want to place a buy stop order a few ticks above the gap day high price. This way your trade will be filled automatically when the market trades above the gap high day.

 

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One Important word of caution, do not take signals that occur after the first 2 hours of the trading day. This is a day trade so you want to make sure you have plenty of time for the trade to develop and achieve some degree of profit.

Don't limit yourself and your opportunities by day trading too late in the day when there is less profit potential and less time for trades to develop.

Place Your Buy Stop Few Ticks Above Gap Day High Price

You can see in this example the entire sequence from beginning to end. Don't forget to cancel your entry stop order if you are not filled during the first two hours of the trading session.

Often times traders forget to cancel their open orders and get filled accidentally, prevent costly mistakes and keep track of all your open orders.

Moreover, don't forget to place your stop loss order immediately after your fill is confirmed.

The stop loss level is placed a few ticks below the signal day low price and the profit target is MOC or market on close. This way you get the most opportunities to profit from this position without having to hold it overnight.

Never Let Your Entry Stop Order Sit For More Than 2 Hours

Second Example Of U Turn Strategy

Keep in mind that you need a strong trending market for this set up to work. I always look for trend lines that slope above 20 percent either up or down.

There are several indicators that you can learn about at WealthPress that discuss how to find a strong trending market so I won't go into this topic in this tutorial.

Always remember to trade with the trend, especially set ups that require momentum in the direction of the trend such as this one.

Make Sure The Trend Is Developed And Moving Consistently In One Direction

The stock pulls away from the trend and appears like it's breaking down for a short period of time. Quickly the stock reverses as buying comes in and closes near the upper range of the trading day.

This is the type of set up you should be looking for on your daily charts after the close each day.

Setups like this one are ways to take advantage of temporary inefficiencies in the market.

The Stronger The Temporary Move Against The Trend The Better

Some traders watch the market and enter orders manually when their entry conditions are met while others enter stop orders and get filled automatically.

 

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For beginners I recommend entering stop orders and for experienced traders I recommend watching the market and doing it manually.

If you do enter entry stop orders make sure you cancel them if they are not filled during the first two hours of the trading day.

The Entire Sequence Intraday View

Here is the final view of the same chart we just saw but using daily charts instead of intra day charts. I always use daily charts first and then once I isolate the pattern I move to intra day charts. For stocks I prefer to use 15 minute bar charts and for E-mini Futures and Forex I use 5 minute charts.

Entire Sequence Daily Chart View

Things To Keep In Mind

The U Turn Strategy is a short term deviation from the main trend. The set up occur quickly and disappear just as quick so you have to find them and take advantage of them as soon as they appear.

Use either stop orders or market orders to enter the trade and never ever enter this type of trade if the entry has not been triggered during the first two hours of the trading day.

Hold the position till the end of the trading day and monitor the position using 15 minute charts if you are trading stocks.

If you are trading futures or foreign currency you can use 5 minute charts instead.

The U Turn Strategy is one of the best short term trading strategies for quick profits and easy management.

 

Roger Scott

Senior Publisher

WealthPress

This article is supplied courtesy of WealthPress.

 

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