Top Reversal
A Top Reversal is similar to a Bottom Reversal, but on a short selling side. Let’s take a look at
Bed Bath & Beyond Inc. as it traded on June 23, 2016. My scanner showed BBBY going up at
10:18 a.m. with six consecutive candles. It had a relative volume of 21.50, which meant it was
trading significantly higher than usual. That was because, as discussed, retail traders look for
unusual trading volume.
I took this trade and made a good profit on it. The candlesticks were not outside of the Bollinger
Bands, but because it was trading with very unusual volume, and forming a nice Doji on top, I
decided to take the trade. I shorted stock when a new 5-minute candlestick was made, with my
stop being the break of the high of the last 5-minute candles. I covered my shorts at $43.40 for a
60-cent profit when the stock made a new 5-minute high.
Example of my Top Reversal real time scanner for BBBY.
Example of a Top Reversal Strategy on BBBY.
To summarize my trading strategy for the Top Reversal Strategy:
1. I set up a scanner that shows me stocks with four or more consecutive candlesticks moving
upward. When I see the stock hit my scanner, I quickly review the volume and level of
resistance or support near the stock to see if it is a good trade or not.
2. I wait for confirmation of a Reversal Strategy: (1) formation of a bearish Doji or
indecision candle, (2) candlesticks being very close or outside of Bollinger Bands, and (3)
the RSI must be higher than 90.
3. When I see the stock make a new 5-minute low, I start short selling the stock.
4. My stop will be the high of the previous candlestick or simply the high of the day.
5. My profit target is (1) the next level of support or (2) VWAP or moving averages or (3)
when the stock makes a new 5-minute high, which means the buyers are once again
gaining control.
Some day traders focus exclusively on reversal trades and actually base their entire careers on
them. Reversal trades are certainly the most classic of the various strategies with a very high
risk-reward ratio and, interestingly, you will always find stocks that are good candidates for
reversal trades. I myself am trading more and more reversal trades these days, especially during
late morning and afternoon trading. However, reversal trading is not yet the cornerstone of my
trading strategies. I am more of a VWAP trader and Support or Resistance trader, which I will
explain later.
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