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Soultrader

Stops and Reversals

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I want to discuss some trading strategies based around stop gunning. The doldrums are notorious for this. Whenever we have price in a bracket, and it breaks out of the range.... the first thing you will see is stops getting taken out. When these stops are taken out, there is no demand or supply iin the direction of the breakout causing a swift reversal. Trading strategies can be designed just like pattern failures and breakout failures. It is usually a good trading opportunity to fade these false moves.

 

On the other hand, if the market stalls and spends some time above the breakout point.... this can indicate a further continuation of the trend. We are simply not seeing sellers stepping in reverse the market. Hence, traders will gain confidence and we can see fresh buying. The breakout resistance becomes support.

 

Now take the opposite perspective. Instead of being the trader who profits from reversals, is it possible to capture the momentum move from the stops being taken out? If other words, if price breaks upwards.. is it possible to enter and exit swiftly to capture this move? My assumption is yes... but only if you are good at reading order flow. I think floor traders have the most edge here as they can simply get in before the move happens. But their behavior to drive prices up/down... wouldnt that be reflected in the charts in terms of candles and price patterns? For example, if x amount of price bars hug the upper resistance... this can be a good indication of a breakout, etc...

 

Please feel free to add your inputs. Thanks

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