The Trend Reversal Trading Strategy Guide

Contents
About The Author..................................................................................................................................... 3
Introduction ............................................................................................................................................... 4
Do You Make These Mistakes In Reversal Trading? ........................................................................ 5
1. You’re Catching A Falling Knife ...................................................................................................................... 5
2. You’re Entering On The First Pullback ......................................................................................................... 6
The 4 Stages Of The Markets And Why It Matters .......................................................................... 8
The Accumulation Stage ....................................................................................................................................... 9
The Advancing Stage............................................................................................................................................ 10
The Distribution Stage........................................................................................................................................... 11
The Declining Stage............................................................................................................................................... 12
How To Identify Trend Reversal Like A Pro ..................................................................................... 13
1. Identify Support On The Higher Timeframe (Daily)............................................................................. 13
2. Identify An Accumulation Stage On The Lower Timeframe (1-Hour) ......................................... 14
The Trend Reversal Trading Setup .................................................................................................... 15
Support & Resistance ............................................................................................................................................ 15
The Breakout ............................................................................................................................................................ 16
The Pullback .............................................................................................................................................................. 17
What About Stop Loss?........................................................................................................................................ 17
Summary .................................................................................................................................................. 18
Do You Want More Stuff Like This? ................................................................................................... 18

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About the Author

Hi, my name is Rayner Teo.

I’m not a multi-millionaire trader, I don’t drive fancy cars, and I don’t live in a
penthouse.
But I am an independent trader, an ex-prop trader, and the founder of
TradingwithRayner.
I specialize in studying great research (from people much more qualified than me)
and applying it to the real-world of trading to find out what works and what doesn’t.
And finally, share them with traders like you so you can become a consistently
profitable trader.
Cheers,

Rayner Teo

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Introduction
You’ve probably heard this a million times…
“Don’t trade against the trend.”
I’ve said it myself often too. But that’s not the only way to trade.
Because trend reversal trading can be crazily profitable — if you do it right.
Imagine:
You know how to identify high probability trend reversal areas.
You can catch market tops and bottoms with heightened accuracy.
You can identify potential trading setups that yield 1 to 7 risk to reward (or more).
Now…
I know it sounds too good to be true.
But it’s not.
Because after you’ve read this trend reversal trading strategy guide, you’ll learn the
secret to picking market tops and bottoms consistently — with low risk.
Here’s what you’ll learn:

• The most expensive mistakes traders make when trading reversal

• What are the 4 stages of the market and why it’s essential to a trend reversal
trader

• How to identify trend reversal like a pro

• How to time your entries & exits in trend reversal trading

Are you ready?
Then let’s begin…

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Do you make these mistakes in reversal trading?

Here’s the thing:
Trend reversal trading can be a profitable way to trade the markets. However, like any
other trading strategy, there is a correct and a wrong way to do it.
Before I teach you the correct way to do it, first let me explain how you should NOT
trade market reversals.

1. You’re catching a falling knife

For those of you who don’t know what’s catching a falling knife, it means trying to long
the markets when it’s plummeting like a rock.
It looks something like this:

If you ask me…

There’s absolutely no sense in trying to catch a falling knife.
Why?
Because there’s no logical place to put your stop loss; there is no Support or market
structure you can refer to.
And usually, the only way to set your stop loss is based on the equity left in your
account — a surefire way to lose it.

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This is something I discovered when I read this quote by Jesse Livermore…

“Rome was not built in a day, and no real movement of importance ends in one day
or in one week. It takes time for it to run its logical course.”
I realized most traders are losing money because they are trying to anticipate that
trends will reverse immediately. But the fact is, trends need time to reverse its
direction. It needs to sucker in “the latecomers to the party” till there is no one left to
buy — and that’s when it goes in the opposite direction.

2. You’re entering on the first pullback

Now, another mistake traders make is attempting to trade the first pullback.
This means you go long when you see the market rallies after a huge decline. But
often, this type of rally is only a retracement of the existing trend.
Here’s what I mean:

You’re probably wondering:

“Why do traders do this?”
Because of the fear of missing out (FOMO).
You don’t want to miss the next big move, thus you enter as soon as the markets show
a sign of reversal. Unknowingly, this sign is usually a retracement of the existing trend.
And even if you catch the bottom in the markets, it’s unlikely you’ll hold the trade for
long.

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Why?
Think about this…
Prior to this trade, you’d probably tried to catch market bottoms often. And while
doing so, you’d have suffered multiple losses along the way — and this hurts your
psychology.
So when you finally catch a bottom in the markets, you won’t hold the trade for long
as you’ll experience the fear of losing (from your earlier trades). This causes you to
exit your trades quickly and you end up missing the big move.
Now, let’s move on…

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The 4 stages of the markets and why it matters

Now before you can identify trend reversal, you must understand the 4 stages of the
markets (a technique I learned from Stan Weinstein).
Why?
Because this gives you warnings that market conditions are about to change — which
lets you plan trading decisions ahead of time.
The 4 stages of the markets can be broken down into:

• Accumulation stage

• Advancing stage

• Distribution stage
• Declining stage
Let me explain…

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The accumulation stage

The accumulation phase looks like a range market in a downtrend. However, from an
order flow perspective, the buyers and sellers are in equilibrium (that’s why the
market is in a range instead of a trending market).
Generally in the accumulation stage:

• The ratio of bullish to bearish candles are close

• The 50-period moving average is flattening out

• The price whips back and forth around the 50-period moving average
As time goes by, stops will gradually build up beyond the range as traders long near
the lows and short near the highs of the range.
An example:

Now… there’s no guarantee that the market will reverse from here. But it should alert
you to the possibility that the bears are getting weak and the bulls could take control
and push the price higher above the highs of the range.
And when this occurs, it leads us to the next phase…

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The advancing stage

The advancing phase is essentially an uptrend with price making higher highs and
lows. From an order flow perspective, the buying pressure overwhelms the selling
pressure (that’s why the market is trending higher).
Generally in the advancing stage:

• There’s more bullish than bearish candles

• The bullish candles are larger than the bearish candles

• The price is above the 50-period moving average

• The 50-period moving average is pointing higher

An example:

Now… the advancing stage eventually will need to “take a break” because the early
buyers will take profits and sellers will look to short the markets as prices are at
attractive levels.
When this occurs, it leads us to the next phase…

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The distribution stage

The distribution phase looks like a range market in an uptrend. However, from an
order flow perspective, the buyers and sellers are in equilibrium (that’s why the
market is in a range instead of a trending market).
Generally in the distribution stage:

• The ratio of bullish to bearish candles are close

• The 50-period moving average is flattening out

• The price whips back and forth around the 50-period moving average
As time goes by, stops will gradually build up beyond the range as traders long near
the lows and short near the highs of the range.
An example:

Now… there’s no guarantee that the market will reverse from here. But it should alert
you to the possibility that the bulls are getting weak and the bears could take control
and push price lower below the lows of the range.

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The declining stage

The declining stage is essentially a downtrend with price making lower highs and
lows. From an order flow perspective, the selling pressure overwhelms the buying
pressure (that’s why the market is trending lower).
Generally in the declining stage:

• There’s more bearish than bullish candles

• The bearish candles are larger than the bullish candles

• The price is below the 50-period moving average

• The 50-period moving average is pointing lower

An example:

Now… the declining stage eventually will need to “take a break” because the early
sellers will take profits and buyers will look to long the markets as prices are at
attractive levels.
When this occurs, it leads us back to the accumulation phase.

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How to identify trend reversal like a pro

“But Rayner, how do you know if the market will break higher of the accumulation
stage, and not just continue trading lower?”
That’s a great question.
The secret is this…

You want to identify an accumulation stage that leans against the Support on the
higher timeframe.
Here’s how to do it:
1. Identify Support on the higher timeframe (e.g. Daily)
2. Identify an accumulation stage on the lower timeframe (e.g. 1 hour)
Let me explain…

1. Identify Support on the higher timeframe (Daily)

Look the market to approach Support on the Daily timeframe; the more significant the
level, the better.

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2. Identify an accumulation stage on the lower timeframe (1-hour)

Then, go down to the lower timeframe and identify an accumulation stage. This
means the market is ranging after being in a downtrend. An important thing is for the
lows of the accumulation stage to lean against Support on the higher timeframe.

As a general guideline:
If you identify Support on the Daily timeframe, then you can identify an accumulation
stage on the 1 to 4-hour timeframe.
Or, if Support is on the Weekly timeframe, then you can identify an accumulation
stage on 4-hour to Daily timeframe.

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The trend reversal trading setup

Now, there are 3 ways you can trade this setup:

• Support & Resistance

• The Breakout

• The Pullback
Assuming you’re using the Daily and 1-hour timeframe combination, these setups will
be found anywhere between the 1 to 4-hour timeframe.
Let me explain…

Support & Resistance

If you haven’t realized by now, the low of an accumulation stage is an area of Support
(plus it’s leaning against the higher timeframe Support). So, if you’re expecting higher
prices, won’t it make sense to go long at this area?
Here’s what I mean…

Pros:
This setup offers a very favorable risk to reward as you’re entering in the earliest stage
of the move. Imagine, your potential reward if the market breaks out of the
accumulation stage?

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Cons:
The price may not re-test Support thus not giving you an entry signal.

The Breakout
Alternatively, you can wait for the price to breakout higher and then enter the trade.
An example:

Pros:
You will catch every move as the market transit from an accumulation stage to
advancing stage.
Cons:
It could lead to a false breakout.

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The Pullback
Lastly… you can wait for the pullback to occur before entering the trade. For example,
when the price retraces to previous Resistance turned Support, and forms a bullish
reversal candlestick pattern.
Here’s what I mean:

Pros:
This setup offers a favorable risk to reward as you’re entering at an area of value
(previous Resistance turned Support).

Cons:
The pullback might never come and you risk missing the move.

What about Stop loss?

Now you’re probably wondering…
“Hey Rayner, how do I set my stop loss on these setups?”
That’s a good question.
My stop loss is placed at a level that invalidates my trading idea. This means if my
stop loss is hit, then the chart pattern is “broken” and I want to be out of the trade.
For a more in-depth explanation, go watch this training video below:
https://www.youtube.com/watch?v=M79kxiOMJJg

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Summary
In this trend reversal trading strategy guide, you’ve learned:

• The common mistakes traders make when trading reversal

• The 4 stages of the markets: accumulation, advancing, distribution, and

declining stage

• You can time your trend reversal entries by trading Support/Resistance, the
breakout, or the pullback

• You should set your stop loss at a level where if the price reaches it, it
invalidates your trading setup

Do you want more stuff like this?

Then check out my website, TradingwithRayner because you’ll learn

new trading strategies and techniques to level up your trading.
There’s no hype or fluff but only the good stuff.
Here’s the link: www.tradingwithrayner.com

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