by George Angell
When is the reversal strategy most likely to succeed? When the market is likely to trend which is often in the first hour, shortly after the open, or the final hour just prior to the close. This is because the market rarely goes dead shortly after the open. To my dictum about taking the reversal trade quickly, I offer these suggestions: One, you must reverse on a market order – not a limit order. There simply isn’t time to pick your price. I once had a client who insisted on getting back in on a limit order. By insisting on his fill, he had to settle for nothing when the market soared out of sight. He ruined a perfectly good and profitable strategy by insisting on a price. Two, you must reverse without hesitation. When the market is ready to run, the window of opportunity may be a minute or less. You simply don’t have time to watch the market for a while. A corollary of this rule is that you cannot let previous losses influence your ability to reverse. Three, in deciding to reverse, you must watch the market carefully. There are often definite signs that the market is ready to run. Four, you must identify the market conditions before you reverse. If you reverse on a non-trending day, you will simply get whipsawed and lose more money. Five, you may want to double on the reversal, for this is often a powerful trade and the losses will be recouped quickly. The nice thing about the reverse-and-double strategy is that you only need one-half the move to recoup 100 percent of the losses on the previous trade. Six, you must not reverse on every trade.
The rule concerning market orders is perhaps the most important to remember. When you buy or sell at the market you can almost always find someone to take the other side. What do you care if you pay to get a position if it is about to run in your direction? There are times when you do have the luxury to pick and choose your price carefully, but not when you have just exited a losing position and want to reverse. I know the prices on the screen may seem inviting, but chances are the rally or break is already underway and there simply isn’t any trading taking place at that price. As in football, where a winning touchdown can often be accomplished in the final 15 seconds, creating a winner in the game, a few precious moments can make all the difference in the futures market.
Knowing that you should reverse and doing it are different. That’s why you want to think about this strategy before the reversal situation presents itself. After all, you have just taken a loss when you reverse, you may indeed be setting yourself up for more losses. This is an emotional situation. But if you are to trade like a professional, you must be able to quickly extricate yourself from a difficult situation and try to take corrective action. The tendency is to want to “watch” the market a bit after taking a loss. This is a mistake. The reason is simple. If the market soars out of sight when you are waiting to get up the courage to take the trade, you have missed the move! Chances are, it’s not coming back – nor, for that matter, would you want it to. If the market again retreated, the move probably wouldn’t be any good. Once mastered, of course, this strategy in which you must risk throwing good money after bad will stand you in good stead.
Successful trading involves overcoming your own personal shortcomings – not beating the market. Winning traders know what they must do to win. Having control over their emotions and taking intelligent risks is the key to winning.
Since the reversal trade is, in part, an attempt to undo the damage created by the first losing entry, you must monitor the trade carefully. You are striving to accomplish two goals at once. One, you are trying to win back the money you just lost. Two, you are trying to capture the short-term trend and earn a profit. As with any trade, you must be waiting to grab the profit that the market gives – not the one you want or feel entitled to.
A word of caution: good things tend to be short-lived in the futures market. When you reverse – especially when you double – and the market runs your way, be wary of the initial euphoria you will experience. This is the time to be cautious, not reckless. Nail down the profit and congratulate yourself for the presence of mind to trade yourself out of a difficult situation. Relatively few futures traders have the courage to implement this strategy.
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