Trend-Reversal Entry Strategies*

Market Wise Trading School

Breakfast of Champions

December 10, 1999

William 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 Low
Risk and Acceptable Capital Exposure.

• Loss Control or Identifying the Protective Stop-loss Level Is

the Most Important Factor in Trading.

• The Same Methodology That Governs Your Trade

Opportunity Should Provide the Exact Market Activity That
Voids That Opportunity.

• Your Stop-loss Level Must Always Be Determined Before a

Trade Entry Is Initiated.

• If the Market Activity Does Not Allow Entry Within Your

Acceptable 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 to

Buy at or Near the Bottom and Sell at or
Near the Tops

Trend-Reversal Entry Strategies

(cont.)

• These Daily Reversal Signals Are Only Valid As

Trend Reversal Signals When the Technical
Analysis Indicates the Market Is in a Position for
Trend Reversal.

• These Daily Reversal Signals Frequently Occur in a

Trending Market, but Will Not Result in Reversal
Unless the Market Is in a Time and Price Position
for a Reversal.

• For Most Markets, One of These Signals Will

Occur at 70%-80% of Trend Reversals of All
Degrees.

Reversal Day (RD) Entry Signal

RD

KRD

Lower Open &
Close Below Open.

Lower Close

OSRD

OSKRD

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

New High

Signal Day (SD) Entry Signal

SD

The close does not
have to be below the
prior day’s close.

GSD

Gap

Gap left at the
close 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 current
day’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 the
upper 1/3.

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

Reversal-Confirmation Day

Signal (RCD)

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

RCD

RCD + new
daily low

Trend-Reversal Summary

• These Trend-reversal Entry Strategies

Only Work at True Trend-reversal -- Not
for Trend Continuation.

• If One of These Daily Reversal Signals

Does Not Occur Then Don’t Take the
Trade or Use Another Entry Technique
Such As Reversal-confirmation Day
(RCD) Entry Signal.

• Remember to Maximize Profits - Only

Take High Probability Trades.

Charles Schwab

Snap-Back Reversal Day

Trend-Continuation Entry

Strategies

• Inside-Day Trade Set-Ups

• Outside-Day Trade Set-Ups

• Gann Pull Back Trade Set-Up

Inside-Day Trade Set-Ups

As long as the low of the day prior to the inside-day has not
been exceeded, buy the break above the high of the day
prior to the inside-day.

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

Outside-Day Trade Set-Ups

If the market has first exceeded the prior day’s low, buy the break above
the 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 and
the 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-Ups

Only 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 or

bottom on some exact

mathematical point in proportion

to some previous move.”

W. D. Gann

Gann Pull Back Trade Set-Up

Trend
Down

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

Sell-stop to enter one tick
below 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 to

Enter

PBS

Exit on close if the close
is above the entry day
open and the prior day
close.

Sell Stop
to Enter

If the market has made at least a three day counter-trend, on the next day sell one tick
below 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 strategies
are a matter of probabilities. Losses are
inevitable and a cost of doing business. The
trading plan must provide a stop-loss
approach that minimizes losses when they
occur.”

Robert C. Miner

Protective Stop-Loss Placement

•

The Protective Stop-loss Should Be Kept Relatively Far
From the Current Market Position Until the Trend Is
Confirmed.

•

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

•

As Trend Continues, Traders Must Have a Plan to Adjust
Protective Stops to Either Reduce the Capital Exposure for
a Loss or Protect Unrealized Profits.

•

If a Market Approaches a Set-up Indicating a High
Probability That the Trend Is Terminating, the Protective
Stop-loss Should Be Brought Very Close to the Current
Market 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

2

3

3DL

1

Figure 3

2

3

3DL (inside-days not counted)

b

a

Figure 2

2

3

3DL

1