Hi LBM, I always prefer to see a close above the high of the...

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    Hi LBM,

    I always prefer to see a close above the high of the downbar before I consider the reversal 'complete'.
    Just to work through the basic theory of what has potentially gone in a reversal like this (or how I understand it), so you have a better understanding........
    A reversal like this is actually a shakeout, but over a longer timeframe.........look at the down bar, and on your chart you can see the open, and how price has moved up a little, but then came down to close near its lows. Now what has potentially happened there is price moved higher after the open, found resistance (sellers), and has pulled back (in an attempt to shake them out). So the high of that downbar shows where near term resistance is (on an intraday chart it would be clearer, and a resistance line would likely be drawn there). Then at some point the seller's supply is absorbed (bought), which is seen as support coming in, and the low of that bar is set. Then the next bar begins (and all of the supply is hopefully bought), and if successful the lack of ongoing selling pressure allows price to move back up with ease, on low volume (because there are potentially no sellers left at this level, at least temporarily).
    Now sometimes as price is moving higher, back through the body of the downbar, supply appears again, and it becomes more difficult for price to move higher and the close ends up being within the range of the downbar....for me this is an incomplete reversal, and it is 50/50 whether it ends up completing or it fails.
    But when price climbs right up and closes above the downbars high, it suggests that the sellers were indeed successfully absorbed at the low of the downbar, and the previous resistance, the sellers, have been potentially removed (on an intraday chart, where you drew a resistance line, it would see price dip down and then come back up, and would appear as a potential breakout).

    Now finally, these reversals don't always work.
    They usually work best in uptrends or with potential strength behind them (strong buying), they work OK in a sideways range (especially when occurring near the lows of the range, and not as well in a downtrend (or when weakness is behind them (selling).
    So you can enter with a lot more confidence in an uptrend, and expect a decent rise over multiple bars in the future if they start working......whereas in a downtrend, price may only put in an upbar or two before more supply is drawn out, and the downtrend continues.

    So what Rav and I are doing here , is to search out downbars which may eventually show they are actually the first half of a reversal, and on that BMN chart, the idea is to already be in the trade.....or in and already out.....or if still holding - preferably with the stop already set at breakeven.


    does that make sense ??
    ask more questions if you need to understand some detail.

    cheers
 
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