The Intra-Day Reversal is a pattern that has occurred approximately 14% of the time over the past five years. When applied to over 400 stocks from the S & P 500.
Our goal is to avoid this pattern, when trading a directional trade. An intra-day reversal demonstrates a lack of market direction. It also demonstrates increased volatility.
When does this pattern have a tendency to occur?
This pattern occurs more frequently off the Open and in ‘Fast Moving’ markets.
The pattern occurs more frequently during periods of increased volatility.
When the overall markets (SPY/DIA/QQQ) gap open.
How can we reduce the risk that we could get caught in this pattern?
Allow for an Opening Range period of time to allow the markets to make a directional move. Then position yourself to enter a trade in a pullback.
Allow for the market to move above the ML1 level and enter on a pullback.
Allow for the market to move below the MS1 level and enter on a pullback.
Second Cross Entry
In this type of entry you want to allow the market to make a move to a level (ML1/MS1). After this move, a decent pullback (20-50%) would be in order. If the market crosses back over the ML1/MS1 level enter at that time.
Do not trade during high volatility markets.
Do not trade during the following high volatility events:
Fed Meetings and Announcements
Earnings Announcements
After or During Elections
For Industry Specific Events to watch out for the possibility of increased volatility:
Oil Inventories – Wednesday