The two period reversal
is originally taken from the 2-day reversal pattern and
as the name implies this particular pattern consists of
two periods. I use two periods and I apply this pattern
to all securities and time frames. A period could be 1
minute or 1 month depending on the time frame you are
looking at. I like to see this pattern after a strong
move up or down. It does not work in periods of
consolidation.
For the two period
reversal down, the first period should be at the end of
a strong move up. The close should be near the high and
it is preferable that this high should be a new recent
high. The second period should open near where the first
period closed and should lose most if not all of the
first periods gains and close near the low of the first
period (see first chart).
This is the set up and
you are now ready for the trade. Once the second period
has closed you can enter short the market with a stop
loss order just above the first or second periods high
depending on which is higher. If the trade is to work is
should not retrace back above the high of the two
periods.
For the two period
reversals up, the first period should be at the end of a
strong down move. The close should be near the low of
that period and it is preferable that this low is a new
recent low. The second period should open near the close
of the first period and should regain most if not all of
the first periods losses and close near the high of the
first period (see second chart).
Once set up you can now
enter the market long with a stop loss order below the
low of the lowest low of the two periods. With both the
up and down reversal there may be some retracement
before the trade takes off but it should not pass below
the low of the two periods or the high of the two
periods depending on which direction you are trading.
I have found this trade
to have a high probability of success, it does not
however happen that frequently in the markets I have
observed. It does however happen with sufficient
frequency to have it on your list of set ups to look out
for.
