Trend-Reversal Entry Strategies*

Market Wise Trading SchoolBreakfast of Champions

December 10, 1999William R. Prebble, Ph.D.

*Robert Miner’s 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 LowRisk and Acceptable Capital Exposure.

• Loss Control or Identifying the Protective Stop-loss Level Isthe Most Important Factor in Trading.

• The Same Methodology That Governs Your TradeOpportunity Should Provide the Exact Market Activity ThatVoids That Opportunity.

• Your Stop-loss Level Must Always Be Determined Before aTrade Entry Is Initiated.

• If the Market Activity Does Not Allow Entry Within YourAcceptable Capital Exposure, Then Don’t 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 toBuy at or Near the Bottom and Sell at orNear the Tops

Trend-Reversal Entry Strategies(cont.)

• These Daily Reversal Signals Are Only Valid AsTrend Reversal Signals When the TechnicalAnalysis Indicates the Market Is in a Position forTrend Reversal.

• These Daily Reversal Signals Frequently Occur in aTrending Market, but Will Not Result in ReversalUnless the Market Is in a Time and Price Positionfor a Reversal.

• For Most Markets, One of These Signals WillOccur at 70%-80% of Trend Reversals of AllDegrees.

Reversal Day (RD) Entry Signal

RDKRD

Lower Open &Close Below Open.Lower Close

OSRD

OSKRD

A reversal day top is made when a market makes a new daily highbut closes below the prior day’s close and the current day’s open.

New High

Signal Day (SD) Entry Signal

SDThe close does nothave to be below theprior day’s close.

GSD

Gap

Gap left at theclose of the day.

Open above the prior day’s 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 day’s close, only the currentday’s close.

The initial protective stop-loss is placed one tick above the signal day high.

Gap Signal Day (GSD) is a very strong daily reversal signal.

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 theupper 1/3.

Day 2: Open in the upper 1/3 of the daily range and close in the lower 1/3. Thetwo days may be in any position to each other. The initial protective stop-loss isplaced one tick above he higher high of the two days.

Reversal-Confirmation DaySignal (RCD)

A Trend reversal is suspected, but one of the three trend-reversal patterns was not present. Sell on the close if the close isbelow the current day’s open and prior day’s close. For a morereliable signal add the qualifier that the low of entry day mustexceed the prior day’s low.

RCD

RCD + newdaily low

Trend-Reversal Summary

• These Trend-reversal Entry StrategiesOnly Work at True Trend-reversal -- Notfor Trend Continuation.

• If One of These Daily Reversal SignalsDoes Not Occur Then Don’t Take theTrade or Use Another Entry TechniqueSuch As Reversal-confirmation Day(RCD) Entry Signal.

• Remember to Maximize Profits - OnlyTake High Probability Trades.

Charles SchwabSnap-Back Reversal Day

Trend-Continuation EntryStrategies

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

Inside-Day Trade Set-UpsAs long as the low of the day prior to the inside-day has notbeen exceeded, buy the break above the high of the dayprior to the inside-day.

Place the initial protective sell-stop one tick below thelower of the inside-day or entry-day low.

Trend Up

Trend Up

Buy-Stop to Enter

Protective Sell-Stop Buy Stop

Protective Sell-Stop lower ofinside-day orentry-day low.

Outside-Day Trade Set-UpsIf the market has first exceeded the prior day’s low, buy the break abovethe prior day’s 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 day’s open andthe prior day’s close.

Trend Up

Trend Up

Buy-Stop to Enter

Protective Sell-Stop

Buy Stop

Exit on Close

Trend Up

Trend Up

Buy-Stop to Enter

Protective Sell-Stop

Buy Stop

PSS

Outside-Day Plus Entry Set-UpsOnly 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.

“Every market makes a top orbottom on some exact

mathematical point in proportionto some previous move.”

W. D. Gann

Gann Pull Back Trade Set-Up

TrendDown

Three higher highs.Set-up conditions to sell complete.

Sell-stop to enter one tickbelow the prior day’s low.

Place the protective buy-stop (PBS)one tick above the higher of the entry-day high or prior day’s high.

PBS

Sell Stop to Enter

Sell Stop toEnter

PBS

Exit on close if the closeis above the entry dayopen and the prior dayclose.

Sell Stopto Enter

If the market has made at least a three day counter-trend, on the next day sell one tickbelow the prior day’s low.Place the initial protective buy-stop one tick above the high traded for the correction.

“All market analysis and trading strategiesare a matter of probabilities. Losses areinevitable and a cost of doing business. Thetrading plan must provide a stop-lossapproach that minimizes losses when theyoccur.”

Robert C. Miner

Protective Stop-Loss Placement•The Protective Stop-loss Should Be Kept Relatively Far

From the Current Market Position Until the Trend IsConfirmed.

•The Protective Stop-loss Should Be Brought RelativelyClose to the Market When the Trend Is Scheduled to End.

•As Trend Continues, Traders Must Have a Plan to AdjustProtective Stops to Either Reduce the Capital Exposure fora Loss or Protect Unrealized Profits.

•If a Market Approaches a Set-up Indicating a HighProbability That the Trend Is Terminating, the ProtectiveStop-loss Should Be Brought Very Close to the CurrentMarket 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 2

3

3DL (inside-day not counted)

1

Figure 4 23

3DL

1Figure 3

2

3

3DL (inside-days not counted)

ba

Figure 2 2

3

3DL

1