Chapter 24
Reversal Day
Primary characteristics of reversal days:
- The day trends in one direction and then it trends in the opposite direction into the close.
- Most start as trending trading range days.
- If the reversal starts in the last couple of hours and is strong, it will usually have follow-through on the next day and often the next several days.
Some of the strongest trends begin in the middle or end of the day. Sometimes they originate as trading range breakouts or climactic trend reversals, usually attributed to some news item, but this is unimportant. In either case, the market can enter a runaway trend mode where it trends relentlessly with only minor pullbacks. There are large trend bars with little overlap and mostly small tails. This is a breakout and a clear always-in flip. You must enter quickly, even if the new trend looks climactic and overdone (and it is, but it will likely continue to get much more so!), and swing most of your position. You should trade these breakout spikes aggressively and make sure that you have at least a small position because the move can go very far. Trading strong spikes is described in detail in the section on breakouts in book 2, and reversals are discussed in detail in book 3.
At other times, the market is trending and then begins a pullback, but the pullback just grows endlessly and becomes a trend channel in the opposite direction. There is almost always at least one countertrend spike before the channel begins, so whenever you ...
