Every trader’s dream, when long, is to get in a trade at the lowest price and get out at the highest possible, whereas when short, the goal is to get in the highest price and get out at the lowest. The strategy that better suits this aspiration is called reversal. When price stops its downward move and starts trending upwards this is a reversal. The opposite, when price stops its upward move and starts trending downwards is also a reversal. So this strategy attempts to gauge this unique point where the price will reverse and start a new counter trend. In order to capture the turning point we can use support and resistance as also candlestick patterns. The most possible point for an upward price movement to stop and reverse is a resistance and the most possible point for a downward movement to stop and reverse is support. In combination with candlestick reversal patterns we can enter a high possibility low risk trade. 

Reversal in downtrend

In CTRP daily chart at point 1 we have detect a support level at $22. The criterion we use is the intense upward move from that point (strong demand for the stock). The first time the stock revisits this price has the highest possibility of making a reversal (point 2). This is happening because at point 1 we have four main categories of traders who will buy when price is at point 2. The four categories are the same that make the support/resistance property holds. These are trapped short sellers, traders who enter at point 1 and made profit, traders who didn’t enter at point 1 and lost a good chance and technical analysts who know about support property.

Reversal in uptrend

At point 3 (above) we detect a resistance at $28. The criterion we use is the intense downward move from that point (strong supply for the stock). The first time the stock revisits this price has the highest possibility of making a reversal (point 4). This is happening because at point 3 we have four main categories of traders who will sell when price is at point 4. The four categories are the same that make the support/resistance property holds. These are trapped buyers, traders who shorted at point 3 and made profit, traders who didn’t short at point 3 and lost a good chance and technical analysts who know about resistance property.