Question for experienced reversal traders

Okay so how do you minimize your risk in trading reversal setups? I only trade with the trend which is of course means waiting for the direction to be established. This usually doesn't happen at the very bottom or very top of price moves and takes a while to truly be established. I can't seem to find myself able to trade reversal setups because it feels a bit random to me and because I feel like I can't manage risk as well. I also feel like I miss a lot of good opportunities. Anyone care tto explain their process and risk management (stop loss) about trading reversal setups? indicators as well if possible they use etc strategy?

Basically too how do you measure the risk? You can't really base your stop loss on a previous high or previous low or a fib level if you're trying to trade a reversal top or bottom. And don't say 100 or 50 pip stop losses lol. I usually use 20 at most 30 on trend continuation entries off of the h4 or daily time frames.

Don't tell me you enter without a stop loss and let it float around?

Hi Justin

The 3 best reversal setups I know of are Support/Resistance, Supply/Demand and Harmonic Patterns. I find they all give pretty good reversal signals.

As far as working out where to place your stop- I pick a point on my chart that makes my set-up invalid. This could be 10 pips or 100 pips. It all depends on the trading pair and timeframe.

Once I have worked out my SL, then I work out where I think my TP should go. If the risk to reward is not at least 1:1.5 then I don't take the trade as there will always be another trade.

As primitive as it sounds, placing stop-loss above/below (depending on trade direction) the closest support/resistance levels works. One needs to remember that "ideal" stop-loss is impossible anyway and settle with what simply makes the most sense and serves it's role of limiting risk.

I would think s/r levels should only be taken from higher time frames of at the lowest h4. If I were to do this I would look at daily / weekly. Do you happen to use a pivot + s/r indicator?

Yes you are right. Daily or Weekly TF should be used for s/r levels. No I don't have a s/r indicator but it's pretty easy to spot them yourself. For s/r trading I would tend to rely more on a support or resistance level breaking and then looking to trade on the re-test of that level.

For example recently on NZDJPY - price strongly broke through the 85.850 support level and then as you can see, it re-tested that level. This is a classic break/retest trade.

Daily Chart

The keys to any successful strategy are location and perspective. You need to be trading from clear support and resistance levels and you need to be trading with the overall market picture in mind. That means zooming out slightly to gain some persepctive. If you can add these elements to your trading then you will improve whether that be trend or reversal trading.

Managing risk is essential for playing reversals, however, can also be deemed "simple". I have a very simple rule of thumb, trade $0.01 lots per $500 in the account. Some of the most successful futures traders I know operate trading 1 ES contract per $100k in the account...and they've been trading with this philosophy for 25+ years now. Take it with a grain of salt

Hey Justin you may want to have a think about your second and third post here. You have asked for people to contribute their ideas on how this can be done yet you cut them off by saying don't say 100 pips Sl.......don't say no SL. What if there advice is golden but incorporates No SL or 100 pip SL, are you saying you don't want to hear that advice ?

Cheers

Stu

100 pips is too much don't you think Stu? Before having to decide that you're wrong or right.. and no SL? that doesn't seem good..

Just caught me at the right time there Justin, Good morning. Not saying it is right or wrong just saying "by posting what you did you are potentially alienating a quality reply from someone he may use a 100 SL but highly successful ". Incidentally I have quite often used 100 and more as a stop, but there have been lots of factors influencing such decisions, too numerous to go into here. In my view you are limiting risk when you stick to the edges of monthly and weekly swings, again at these areas risk does not simply go away but is reduced, you then have to a way to trade these zones and sure you are aware there are plenty. When time allows, as price is approaching an area of interest to me, I will then tend to zoom in one time frame at a time and essentially look for price to become tired ( can't really explain that much easier), in doing this even right down to the 1minute I have reduced my risk substantially, in this instance I will increase position size and drastically reduce stop to as little as 7 or 8 pips or so, because I have the confidence to know that if after stalking and scrutinising price so closely and it breaks my stop, no issue I was wrong. When there isn't time to stalk price in this way and as monthly and weekly areas of interest can be so wide it is obvious that stop has to increase and position size reduced. If you are correct in your trade view and it moves into positive territory, using knowledge specific to the pair you can add to your position incrementally and by adjusting stops of the earlier positions with practice and time you will only ever have your last position at risk, all earlier positions will be risk free. I personally don't buy into knowing where it's going but using probabilities gives you a fair idea. There are some excellent threads here at FF one that really switched on the light bulb for me personally a few years ago was the Building a Millipede Thread ( There is a guy who has just started posting on there The Real Deal, his posts alone are all you need ), of course it will only be helpful if it suits your personality, it does mine. I used to chase the 5min all day and that is absolutely fine and there are many who do it really well every day but I'm a Grandad also & just have lots more things to do with the time. Apart from when I am zooming into a big level as said earlier Hope this helps, off to take my grandson swimming now.

I suggest reading about market profile and market auctions etc. This provides context on what a head and shoulders formation etcetc actually represents in terms of people buying and selling. If you learn the reasons why rather than just seeing a nice pattern on a chart then you can get into the heads of those who move the markets. And when you understand how they think...

is there anyone that uses oanda's position ratio here? it seems like most of the successful traders I read about online use it.they use the chart that shows where people have buy stop/limit and sell stop/limit and do reversal trading according to it. I'd like to try it but I don't find how to use it.

Do you mean that:
1/ you would like to find the charts
or
2/ you would like to learn, how to use them?

hello xy76, I don't find websites that explain how to look at the charts and what to do with it in details. I just know that they set buy/sell limit at where people set pending orders and.. they think the price will reverse there or something. or banks/hedge funds look at it, and they try to wipe out amateur traders stop loss.