2018-05-17: Trading a reversal step-by-step

A common strategy to understand complex concepts is to deconstruct their parts and slowly adding them together. This gives you the chance to analyze each component individually and discard those that doesn’t fit you and add those that do. Trading methods are one of those things that is worth the effort to deconstruct and analyze. The trading method that works for a trader doesn’t necessarily work for you, and the one that works for you doesn’t necessarily work for someone else. With this in mind I want to show you step by step how the XBP indicators stack together to form what it is for me a full picture. For you it could be different. The method could seem too simple or too complex, you could take 2 indicators and ignore the rest and be happy or add on top of those 2 another 1 or 2 that work for you.

Let’s see the action that occurred on Thursday 17th of May 2018, first with no indicators in the price chart and only with the lower indicators, XBP Volume Ratio and XBP Tape Speed:

20180517_01

We can clearly see a reversal during the morning session occurring approximately at 11:00am (NYSE time). The XBP Volume Ratio was indicating divergence with price, advancing the reversal. Remember that Volume is a leading indicator, it tell us in advance what is more likely to happen.

The next step is to add the 2 indicators based on price: XBP Price Bars and the ThinkOrSwim built-in Hull Moving Average:

20180517_02

XBP Price Bars shows us the bars that had the highest relative volume (blue) and low volume (yellow). The Hull Moving Average is my confirmation trigger into a trade that the rest of the indicators are hinting at. At the end of the day Price pays 🙂

But this is not enough for me, as I often wonder why Price moves in a certain way or where it will go next. For that I’ve develop an additional indicator that paints the main Support and Resistance levels for the day, including yesterday’s high, low and close:

20180517_03

Through observation I’ve found that the overnight high and low are often key Support and Resistance levels during the intraday action. You can see these levels as small dash purple lines. Soon I will publish a dedicated post to this indicator and the data that I’m compiling for it.

Finally, once all the pieces for my puzzle are put together I can identify and react to my signals and enter a trade:

20180517_04

We have Volume divergence with price, low volume (yellow bars) at the top and a price reversal confirmed by the Hull Moving Average. Price most likely is bound to fall until a major Support level, in this case the overnight high, so we have room to enter a trade for a good 4 points, from 2729 to 2725.

As said at the beginning you can add or substract any of the pieces of my puzzle, for me these are the ones that let me work well. I don’t want more nor less.

Getting the XBP indicators

If you are interested in using the XBP indicators, simply send me an email and we will complete the transaction using PayPal. The price for all the indicators for a life-time license is of USD 100, just 2 E-mini points 😉

PayPal link: paypal.me/xbptrading

 

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