Top 5 Reversal Patterns Pros Trade (Bar-by-Bar)

Reversal Patterns for Intraday & Swing Trading – A Detailed Breakdown

Key Concepts:

• Failed Follow-Through: A price attempt to break a level that lacks momentum and reverses.
• VWAP (Volume Weighted Average Price): A trading benchmark that considers both price and volume.
• Intraday Reversal Patterns: Specific chart formations indicating potential trend changes within a single trading day.
• Higher Time Frame Levels: Key support and resistance areas on daily, weekly, or monthly charts.
• Rubber Band Reversal: A sharp, quick reversal after an initial aggressive move, often trapping traders.
• Bad News Gets Bought: A counterintuitive pattern where negative news is met with buying pressure.
• Opening Range Break (ORB): A price movement that breaks outside the established high and low of the initial trading period.
• Hitchhiker Scan: Identifying stocks consolidating after a strong move, poised for continuation.
• Capitulatory Action: A final, desperate sell-off before a reversal.
• Power Shift: The moment control of the price action transitions from sellers to buyers (or vice versa).

I. Introduction: The Pitfalls of Reversal Trading & Proactive Pattern Recognition

The video begins by highlighting a common trader mistake: entering reversals after they’ve already formed, leading to account losses. Professional traders, however, identify potential reversals three to five bars in advance. The core focus of the video is to detail five key reversal patterns, analyzed bar-by-bar using real-time examples from trades executed that month. The emphasis is on recognizing these patterns before the reversal occurs, allowing for proactive entry and profit maximization.

II. Pattern #1: The Failed New Low & Reclaim – A High Win Rate Reversal

This pattern is presented as the highest win-rate reversal setup of the year. It begins with a stock appearing to bottom, followed by a failed bounce and an aggressive sell-off to a new low. The critical signal isn’t the new low itself, but the reaction to it.

• Detailed Breakdown:
  • Initial Setup: Stock shows initial signs of a bottom, followed by a brief rally.
  • Failed Bounce: The rally fails quickly, with an aggressive sell-off to new lows. This often traps longs and shorts.
  • Failed Follow-Through: The new low lacks momentum and is quickly reclaimed. This is often visible as a “wick” on the chart.
  • Confirmation: The next candle reclaims the lows and clears the highs of the prior candle, signaling a potential reversal.
• Technical Indicators: Holding the two-day VWAP is a significant supporting factor. The crossing of the 9 and 21 Exponential Moving Averages (EMAs) signals a shift in momentum.
• Trading Strategy:
  • Entry: After the reclaim of the lows and clearing of the highs.
  • Target: High of the day, recognizing this is a swing trade setup.
  • Psychology: Expect a “chase” as other traders recognize the reversal.
• Quote: “Reversals are never random. They come from three key elements: location, exhaustion, and a power shift.”

III. Pattern #2: Breaking the Hourly Death Spiral

This pattern focuses on identifying reversals in stocks that have been in a prolonged downtrend, visually resembling a “death spiral” on the hourly chart.

• Detailed Breakdown:
  • Setup: A stock in a clear hourly downtrend.
  • Break of Downtrend: The price breaks above the downtrend line.
  • Intraday Confirmation: A failed new low followed by a reclaim of VWAP.
• Technical Indicators: The 9 and 21 EMAs crossing confirms a momentum shift. Holding the two-day VWAP is also important.
• Trading Strategy:
  • Entry: After the reclaim of VWAP. A “fashionably late” entry when the 9 EMA crosses back above VWAP is also considered.
  • Target: High of the day, with potential for a multi-day trend.
  • Stop Loss: Below the 21 EMA on the 5-minute chart or against the broken downtrend line.
• Quote: “You’re using the backside [failed new low]…you’re using the fashionably late…but you’re trading for a bigger reversal.”

IV. Pattern #3: The Rubber Band Reversal – Exploiting Capitulation

This pattern involves a sharp, quick reversal after an initial aggressive move, often occurring after a period of consolidation.

• Detailed Breakdown:
  • Setup: A stock consolidating after a long day of selling or a long day of consolidation.
  • Aggressive Flush: A quick, sharp move lower, often breaking an opening range.
  • Snapback: A rapid reversal and reclaim of the lost ground.
• Trading Strategy:
  • Entry: On the snapback after the aggressive flush.
  • Target: High of the day or a swing trade target.
  • Stop Loss: Below the low of the consolidation.
• Quote: “This is where it feels like, oh man, this stock is done, right? But then you see distinct buying almost very early on in the day.”

V. Pattern #4: The Hitchhiker – Late Breaking Trend Continuation

This pattern focuses on identifying stocks that are consolidating after a strong move, poised for continuation.

• Detailed Breakdown:
  • Setup: A stock that has been oversold on a higher time frame.
  • Consolidation: The stock holds up during the initial trading period.
  • Break of Highs: A break of the consolidation highs on higher volume.
• Trading Strategy:
  • Entry: On the break of the consolidation highs with increased volume.
  • Target: Continuation of the existing trend.
  • Stop Loss: Below the low of the consolidation.

VI. Pattern #5: Bad News Gets Bought – Counterintuitive Reversals

This pattern highlights the surprising phenomenon of stocks rallying after receiving negative news.

• Detailed Breakdown:
  • Setup: A stock that is not fundamentally weak, receiving negative news.
  • Initial Sell-Off: An initial sell-off on the news.
  • Immediate Rebid: A quick and strong buying response.
• Technical Indicators: Look for a “rubber band” reversal pattern after the initial sell-off.
• Trading Strategy:
  • Entry: On the rebid after the initial sell-off.
  • Target: High of the day or a swing trade target.
  • Stop Loss: Below the low of the initial sell-off.
• Quote: “Bad news gets bought…the second leg feels like it’s going all the way back up to the moon.”

VII. Common Threads & Key Takeaways

Across all five patterns, several common themes emerge:

• Exhaustion: All reversals exhibit a period of exhaustion, a final push, or a climax of volume.
• Power Shift: A clear transition of control from sellers to buyers (or vice versa).
• Higher Time Frame Context: Reversals are more reliable when they align with support/resistance levels on higher time frames.
• Confirmation: Waiting for confirmation (e.g., reclaim of lows, break of highs) is crucial to avoid false signals.
• Targeting Higher Time Frame Levels: Setting targets based on higher time frame levels increases profit potential.

VIII. Conclusion

The video emphasizes that successful reversal trading requires proactive pattern recognition, a deep understanding of market psychology, and a disciplined approach to risk management. By identifying these five patterns before the reversal occurs, traders can significantly improve their win rate and capitalize on profitable opportunities. The SMB Scalp Radar is presented as a tool to aid in this process, providing real-time alerts for high-probability setups.