Trading Market Reversals

Date: 2024-12-29

Eight reversal types

[00:11] Okay, folks, welcome back to lesson five of the May 2017 ICT Mentorship, ICT Amplified Day Trading and Scalping. This lesson is teaching trading market reversals. All right, market reversals. I'm going to cover the eight reversals that I think can be effectively traded with consistency. The first one we're going to talk about is trading previous day's highs. What we're doing is looking for opportunities where the market will blow out the previous day's high, raid the buy stops, and then reverse and trade lower.

[00:54] There are certain criteria I like to look for. Back on BabyPips, when I first introduced myself to the Forex community at large, I gave them an exercise to buy and sell previous day's highs and lows. That exercise was designed to draw your attention to the fact that there are instances where you'll see opportunities created by raiding the previous day's low for sell stops and raiding the previous day's high for buy stops. Not every previous day's high or low is the same in terms of opportunity, but there are criteria I look for when I'm studying the previous day's high. There are buy stops above that previous day's high.

[01:45] There are banking levels. There are intraday algorithms that trade up to those previous day's highs and down to those previous day's lows to seek liquidity resting above or below them, respectively. Knowing the conditions that lead to a raid on the buy stops above the previous day's high is one of the gems of this teaching. Conversely, the opposite is seen when we're looking at previous day's lows, where the market raids the sell stops and then reverses. Again, in this teaching, I'm going to give you one of the little gems in my repertoire for identifying when previous day's lows and previous day's highs are likely to be raided and then followed by a directional reversal.

[02:33] I've received a lot of questions over the years: “How can I sell above an old high and not fear that price will continue going higher?” Or, “How can I buy below a previous low and not fear that price will keep trading lower?” Well, number one, as I've said many times in the free tutorials and throughout this mentorship, I don't know with 100% certainty what price is going to do. But I do have a collection of generic scenarios that tend to repeat themselves when other factors are incorporated into those conditions.

Intra-week liquidity raids

[03:11] By itself, we don't simply go in and try to sell an old high or buy an old low. There have to be other things that blend well with all the teachings I've already given you thus far. Another reversal I like to trade is the intra-week high, where the market trades above the highest high made for the week so far, raids the buy stops, and then reverses. Now, as I give you these scenarios, I want you to think in terms of those weekly templates I provided you in the earlier months.

[03:45] Those templates, in conjunction with the conditions we're talking about here, will begin to unlock as we get closer and closer to August, where you'll basically get a flowchart format from the top down, leading us into specific concepts for specific conditions. For intra-week highs, what I like to do is look for scenarios where the market has already been trading higher for a period of time, for instance, and we have yet to meet a premium array that eventually gets traded up to, maybe on a Tuesday, Wednesday—

[04:20] —or Thursday. It hits that premium array on that particular day, but it also does it on the heels of running a previous intra-week high. I really like that scenario because traders are going to have their buy stops above that initial intra-week high. For instance, price could make a high on Tuesday and then trade higher on Wednesday into a higher time frame premium array. Once that higher time frame premium array is traded to, it's coupled with the buy stops resting above Tuesday's high.

[04:56] So traders who were looking to sell short on Tuesday—because many times Tuesday can create a false decline or a false high—can see Wednesday come up, blow that high out, and then create the high of the week. Think about those weekly templates. This is one of the scenarios I like to look for. Those raids on the buy stops are where I'm going to be selling right into that same liquidity pool, just like the banks will. The opposite is obviously seen in the form of an intra-week low, where we see the lowest low of the week violated on the downside, the sell stops raided, and then the market reverses.

[05:34] Again, for day trading and scalping purposes, these are really high-odds trades. Even if price doesn't continuously move higher as a reversal, many times you'll get a tradable bounce of 30, 60, even 80 pips, depending on the market environment and what you're trading at the time. The weekly low that's formed in the middle of the week could be Monday, Tuesday, Wednesday, or Thursday. Whatever that low is, if price trades down below it into a higher time frame discount array, that can create a very favorable reversal condition. Couple that with running out a previous intra-week low and taking the sell stops belonging to individuals who are trying to capture the move long prematurely.

[06:26] Market makers will engineer liquidity for that very thing to happen. So, for instance, if the low of the week was formed on Tuesday and price rallies, but then Wednesday trades down below Tuesday's low and hits a higher time frame discount array, that could be a Fair Value Gap on the daily chart, an Order Block on the weekly chart, or anything else in the higher time frame PD Array Matrix. That is a wonderful opportunity to look for an intra-week reversal.

Intermediate-term reversal context

[06:55] Intermediate-term highs. Now we're going a little bit longer term. It may be the high of the previous week or a week before that. So we're going further back in time. What we're looking for is basically a run above an old high. The buy stops resting above that old high are raided and the market reverses. Now, this can be a little tricky because with old highs and the buy stops resting above them, you have to look at the context of the marketplace at the time.

[07:37] Again, it's not simply, “Okay, we're trading above an old high, so therefore it's going to act as resistance. Let's just sell it.” No. You have to look at the purpose. What's the storyline behind why price would be permitted to trade above that intermediate-term high? Yes, they're looking to take the buy stops, but there's a storyline behind it. Is it pairing those orders with an exit of long positions? Or is it going up there to engineer liquidity, put people on the wrong side of the marketplace, and then go lower?

[08:09] Those ideas have to at least be considered. So not every old high is one you should be selling short at. Many times price will trade through an old high and continue going through it. You have to look at the context of the marketplace at the time of your analysis and determine whether we're in a move that's most likely going to continue through that high, or whether we're due for a reversal because trading above that old intermediate-term high fulfills a higher time frame PD Array. Or maybe it goes above that high after a long, prolonged uptrend where logical profit-taking would be expected.

[08:50] Obviously, the reverse is seen with an intermediate-term low, where last week's low, a low from a couple of weeks ago, or even the previous month's low is traded below, sell stops are raided, and then the market reverses. Just as we said with the intermediate-term highs, we don't simply buy the sell stops and anticipate a reversal at every old low. There has to be context. What's the storyline again? What is the purpose for market makers to permit price to trade down below that old low?

New York and London reversals

[09:28] Are they scooping up sell stops to use as an exit for short positions they've been holding? Or are they looking to knock out individuals who were already long, unseat them, and take over those long positions? Okay, New York session reversals. When we look at the New York session, generally it's a continuation. The characteristic of New York that I like to view first and foremost is that it generally continues what was already established in London. If London was bullish, rallying and making the low of the day, then I'm initially looking for signs that New York will continue that move higher from the New York open into the London close.

[10:18] But there are instances where London creates what appears to be the low of the day, rallies higher into New York, and then New York reverses lower. You end up with a lower close on the day. That occurs when the market trades into a higher time frame premium array. The reverse can also be seen. London can start trading lower and create the high of the day, then New York creates the low of the day, reverses, and ultimately closes higher on the day above the entire range that was created during London.

[10:57] So New York session reversals occur when price eventually trades into a higher time frame discount or premium array. And with the London close, everything I just mentioned regarding New York session reversals applies there as well, but there's also an intraday component. Obviously, on large-range days, when we exceed the 5-day Average Daily Range—for instance, say Euro-Dollar's Average Daily Range over the last five days indicates it should be around 100 pips—

[11:36] —and let's say it rallies 160 pips. Once we get into 10:00 and 11:00 in the morning New York time, you can anticipate a London close reversal for an intraday scalp, where price wants to retrace a certain portion of that range. We'll talk about that later. London close can create a reversal just like I outlined for New York, but it also always has the potential to create an intraday scalp. I like to do it only when the Average Daily Range of the last five days has been exceeded by at least 1.25 to 1.3 times.

[12:14] In other words, if ADR is 100 pips, I want to see 125 or 130 pips, or more. Then, between 10:00 and 11:00, if I see some measure of weakness, or if price fulfills the numbers as we taught in the previous lesson, you'll learn there is a measurable and tradable retracement back into the daily range. But I don't like taking that type of trade when the range is smaller than the last five days' Average Daily Range or if the move wasn't really explosive.

[12:49] The better trades are when the market has a very large, one-sided expansion and moves a lot very quickly. Then, at the London close, you generally get a lot of intraday profit-taking, and you'll see some retracement of that total daily range. So when we're focusing on market reversals, we're looking first and foremost for a clear indication that the market wants to move in the opposite direction. But let's look at each one of these in a little more detail. All right, trading previous day's highs and lows.

[13:21] Looking at this example here, this is pretty much what I was trying to get people to look at when I first came onto the scene on BabyPips. I said, “Look, let's take a look at the previous day's highs and lows and see whether there are reversal characteristics there.” Again, the purpose was to get people thinking about how the market moves after running buy stops and sell stops. For the most part, the neophytes that haunt these forums are always in confusion.

[13:53] They're always trying to figure out what they should be doing, and they're chasing things that don't lead to greater understanding. Generic things like time of day, highs and lows formed in London, the opposite end of the range, and how the close forms—these are important. New York is generally a continuation. Rarely will it become a reversal, but when price reaches a higher time frame PD Array, that's when you anticipate the New York session potentially becoming a catalyst for reversal. When we look at previous day's highs and lows, every single trading day you should always refer to how today's price action traded in relation to the previous day's range.

[14:31] Did we work the daily high or daily low of the previous day? Or the day before that? Or the day before that? What you're doing is always referring to the last three days, counting today as one of them. You'll see that there's a lot of influence around the liquidity resting above and below those respective days' highs and lows. Now, there are two circumstances when we're looking to fade price beyond the previous day's range. There are characteristics and conditions that we look for.

Previous-day range reversals

[15:03] In my opinion, this is kind of the crown jewel of this particular teaching. During expansion swings, there are smaller retracements that typically create opportunities where the previous day's low is raided and then price rallies higher. In opposing expansion swings, there are retracements that create opportunities where the previous day's high is raided and then price declines. Obviously, it's the concept of Turtle Soup, which is a false break above an old high or a false break below an old low, but it's one step further than that.

[15:38] So when we're looking at previous day's highs and lows, when am I really looking to trade below the previous day's low and be a buyer, or above the previous day's high and be a seller? When I'm looking to trade below the previous day's low, I'm anticipating higher prices. In this example, you can see price was moving higher as part of a larger expansion swing, and during a normal retracement lower into a Fair Value Gap, price finds buyers below the previous day's low.

[16:07] Using the previous day's low and anticipating a market reversal after that low is raided, you can be a buyer intraday. So take a look at this candle right here. This candle opens, trades down, closes in the Fair Value Gap, and then rallies higher and has a higher close. The candle prior to it—notice price trades down below that candle's low. So you could already be thinking about being a buyer below that candle's low because the Fair Value Gap exists below it and price is offering a retracement.

[16:40] Your understanding of institutional order flow on the higher time frames is going to assist you here. While markets generally retrace, during those retracements what you're looking for is a move down below the previous day's low and also into a discount array. In this case, it's a Fair Value Gap. Price trades below the previous day's low. That's where you're going to find buyers. The market comes in with a great deal of institutional sponsorship and sends price higher intraday. We look for confluences of PD Arrays to support the idea of buying below the previous day's low. But we don't simply buy below the previous day's low solely because price moved below it.

[17:22] There has to be context behind all of it. Now, trading previous day's highs: if I'm bearish on the market and institutional order flow is suggesting lower prices on the higher time frames, I like to look for reasons to see price move up into a short-term premium array. Like we see in this example here, price was moving lower as part of a larger expansion swing. During a normal retracement higher, after a Fair Value Gap was filled, price finds sellers above the previous day's high.

[18:00] This candle here trades above the previous candle. When price trades above that previous day's high, the market finds sellers, and you can be a seller that day. Again, obviously, we're using context. We're not simply looking at it and saying, “Okay, we're above yesterday's high, so I'm going to be a seller.” It doesn't work like that. You have to understand what institutional order flow is indicating. In this case, we're looking for institutional order flow on the weekly, daily, or 4-hour chart to suggest prices are going lower.

[18:33] If we have that and price trades up into a premium array during a retracement—in other words, it's been moving lower and now we're getting a little bounce higher—once price trades into that premium array, that's what you couple the idea with. Then, if price trades above the previous day's high, you can be a seller above that high and anticipate expansion to the downside. Trading intra-week highs. In this example, we can see price was trading above equal highs on Thursday of this particular week.

[19:11] Price raided the buy-stop liquidity pool at a premium array. When we use intra-week highs and anticipate a market reversal after the buy stops are raided, that's when you can step into the marketplace and be a seller intraday. You've heard me talk about this. We've mentioned it a lot in the early teachings of this mentorship and throughout my free tutorials. When we look for equal highs, we know that's Candyland, as we call it.

[19:38] It's very easy to see that retail is going to have buy stops resting just above those equal highs. Any raid above them, 10 or 20 pips above, can scoop up those buy stops. Then many times the banks will sell right into that liquidity, and that gives you your day trade as a short. Again, like we've said with everything else, we're not simply looking to sell right above an old high or even old equal highs, because sometimes old equal highs are simply targets for a longer-term move higher.

[20:07] But when conditions suggest we're in a neutral state—in other words, we're consolidating—or we're getting ready to turn the tide by trading up into a higher premium array, which in this case exists just above those equal highs, then if we see confluences of PD Arrays supporting the idea of selling above an intra-week high, we can step in as a seller during London or New York. Also think in terms of what price may be unfolding through an overlap of these reversal concepts.

[20:37] See, we have a Tuesday high, and then Wednesday has a slightly lower high, but they're basically equal highs. We know there are going to be buy stops above that. So on Thursday, price rallies above them. At that same time, it could also be seen as a New York reversal. So you're blending a couple of different things together. When you see these reversal concepts overlapping, it makes the setup even stronger. Trading intra-week lows. In this example, we see price trading below the equal lows on Tuesday of this particular week.

[21:11] Price raided the sell-stop liquidity pool at a discount array. Now, if you look, I've shown a low from the previous week because those double vertical lines represent Sunday. You have equal lows on the previous Friday and Monday. Those two equal lows are traded through on Tuesday, violating that old low. So you have an intra-week low that can be blended with the previous week's range as well, especially when the reversal occurs on Monday or Tuesday, as we see in this example.

[21:43] Using an intra-week low and anticipating a market reversal after the sell stops are raided, you can be a buyer intraday. Again, like we just said with intra-week highs, we're not simply looking to be a buyer below an old low or below equal lows. There has to be context. The move that drops down on Tuesday below those equal lows formed on Monday and Friday in this chart is trading into a higher time frame discount array.

[22:15] When you're staring at intraday charts without any reference point from the higher time frame, you're going to miss these beautiful scenarios where you can clearly see where manipulation is likely to take place and where they're going to run the sell stops. Again, like we've said with the previous examples, we're not simply buying below an old low. We're looking for confluences from the PD Arrays to support the idea of buying below an intra-week low. We don't simply go in and buy below a low just because price moved beyond the intra-week low.

[22:46] Trading intermediate-term highs and lows. All right, in this chart here you can see price trading in a large consolidation. Periods when the market is not trending strongly in one direction offer ideal conditions for shorting above an old high and buying below an old low from a previous week or even further back in time. So when we look at reference points classified as intermediate-term, we're talking beyond just yesterday. It can be as recent as earlier in the week, or the previous month, or even two months ago.

[23:26] Old lows and old highs like that are gold mines. Think about who would have stop losses resting below or above those reference points. The whales, those large fund traders, when they have orders in the marketplace, their stops are going to be positioned around these higher time frame highs and lows. So if the market trades back to them, it's gunning those stops. Studying old highs and old lows while incorporating the PD Array Matrix is going to assist you in finding higher-odds day trades. These setups tend to present themselves more in terms of a dynamic response in price than simply looking for what would be considered an Optimal Trade Entry or a basic Order Block.

[24:13] Again, none of my concepts are panaceas. They're not the be-all and end-all. They don't stand alone. They have to be blended with other things. When you incorporate these setups with the PD Array Matrix and higher time frame institutional order flow, you're going to find dynamic reactions. That's always a bonus for you as a day trader because we need movement. We need displacement. We need rapid movement so we can get paid before the end of the day. We're always battling time, and we're always battling the uncertainty of whether we're going to get enough magnitude from the move.

[24:47] Most statistics state that day traders don't make money consistently over time because, number one, they don't look for conditions that are ripe for day trading. This week, we had some instances during our live sessions where we were able to call very precisely what the market should be doing and where it should go next. There were other instances after my objective for the week had already been met where you saw my analysis was off, but I wasn't going into the marketplace and trading anymore.

[25:19] That skill set comes with experience. You're not going to be able to do this simply by taking these concepts and saying, “Okay, plug and play. I'm going to be good.” It takes experience doing it for a while, seeing it, and developing a feel for it. That experience factor can't be communicated in a teaching. It has to be earned, and you have to earn it over time. When the market lacks directional trend and one-sidedness, those conditions tend to offer more opportunities to trade like this than not.

[25:56] So when traders identify range-bound conditions in their charts, once you've practiced this several times and studied examples from the past, you'll begin to recognize it. You might find yourself on a Saturday morning waking up before anybody else in the house, sitting down with a bunch of charts. I used to do this for years before I had children. I loved it. Not that I don't love my children, but I loved the fact that I could spend my time doing that uninterrupted.

[26:26] I wouldn't have any distractions, and I could literally pore over charts and build scenarios around why price went up here. Who did they knock out? Why did they knock those individuals out? What was the purpose of going up there? When I first started trading, I thought the market topped simply because buyers stopped buying. There are still a lot of people who teach that premise in the marketplace. That's not what it is. It's the absence of market makers offering price higher. They simply don't offer it any higher.

[26:59] Because believe me, if they want to offer at a higher price, they can. All they have to do is offer the price, and they'll put whoever they want in at that price because a market order is a market order to get in right now. They can couple that with a ridiculous price level outside the normal range. Once I understood what price was actually doing and the behind-the-scenes view of what takes place during runs on liquidity, reversal trading became much more my cup of tea.

[27:33] I liked it, which is one of the reasons my London Open strategy became such a large part of my Forex repertoire. Because essentially, what you're doing is looking for reversal patterns every single London session. When we're looking for bearish moves, the Judas Swing is going to rally higher. What we're doing is trying to time that intraday reversal. So these reversal concepts can be large in scale with intermediate-term ideas, like what I'm describing here. But they can also be reduced down to the London Open Judas, the CME Open for the New York Judas, and Asia has its Judas at 8:00, then you also have 0 GMT.

New York reversal conditions

[28:19] And you also have it during the London close on days that create London close reversals, as we'll talk about. Okay, New York session reversals. When we look for New York session reversals, the first thing to remind yourself of is the weekly templates I provided in earlier teachings. Those are going to provide the basis for studying current market structure and learning to anticipate what the New York session is going to do in terms of continuation or reversal. While a reversal can occur on any day of the week, we've learned that certain weekly templates are more likely to unfold than others.

[28:58] Knowing the higher time frame PD Arrays and the IPDA data ranges the market is presently respecting allows scenarios to be outlined in our analysis. If there is a higher time frame discount array below market price that has not yet been met, and price trades down into it during London's move while crossing into the New York open, that's the classic New York session reversal condition. Obviously, you reverse these conditions when you're looking for the opposite type of market reversal during New York.

[29:30] In simple terms, when we see price trade down into a discount array on a higher time frame chart and it happens around the New York open, that's when the highest probability of a market reversal occurring during New York is going to be seen. As long as New York has not traded down into a higher time frame discount array or up into a higher time frame premium array, the New York session will generally be slated as a continuation of what was seen during London.

[30:09] So, in simple terms again, unless the New York session opens into a premium array on the higher time frame or a discount array on the higher time frame, New York will generally be expected to continue what was seen during London. So if a high formed in London and we're expecting bearish prices, New York is going to be a continuation. That changes if London trades lower into New York and New York trades down into a higher time frame discount array.

[30:43] Then you anticipate a market reversal higher. The reverse is true when the London session creates the low of the day, price rallies up, and crosses into the New York open at a premium array. Once the New York session trades up into that premium array, expect a market reversal during New York. Price trades higher into that premium array only to go lower on the day. That's when you expect the New York session reversal. The characteristics are simple, but what many of you aren't understanding is that you have to see it, study it, and look at it repeatedly.

[31:18] If I give you one or two examples, that's not enough. You need to go find them in your own charts and see them. Make notations. Draw some notes on your charts and study them repeatedly. Go over them again and again. By having the higher time frame PD Arrays outlined on your daily chart and transposed onto your lower time frames, you won't be blindsided by these reversals. When I talk about the likelihood of seeing a market reversal profile during the New York session, every time I mention it I receive 30 or 40 different emails from members in our mentorship, and it's always the same question: “How do I know it's going to reverse?”

[31:54] Because you didn't see it trading into a higher time frame PD Array. If it's trading into that higher time frame PD Array, it's most likely going to reverse. There's no mystery here. It's simply a matter of knowing what the higher time frame PD Arrays are. If we're trading into a level that would be bearish and it happens during New York, expect a reversal. It's as simple as that. All right, London close reversals. London close can be used for intraday reversals on large-range days.

London close retracements

[32:23] Again, like I said earlier in this video, for scalps, a large-range day that exceeds its 5-day Average Daily Range tends to retrace about 20% of its total daily range between 10:00 a.m. and noon New York time. In longer-term conditions, the London close can time a market reversal that can lead to a series of days moving in one direction. This is best determined using the weekly templates and studying current market structure. As I indicated on the previous slide regarding New York session reversals, the same thing applies to the London close time period as well.

[32:58] So everything I mentioned on the previous slide about New York, just take New York out and put in London close, without me having to repeat everything. There are also times when you anticipate the New York session causing the reversal, and then later the London close will go back to that higher time frame PD Array and blow out the stops on the New York session reversal, like you see in this example. So always be mindful that even if you're expecting the New York reversal, London can come back and behave like we often see at the London Open.

[33:34] At the London Open, you expect the high to form. Price creates a high, trades down 30 or 40 pips aggressively, and then comes back one more time to knock those stops out before selling off. Well, when we're expecting a New York session reversal, the London close can be that second swipe against traders who are actually on the right side of the marketplace. They're buying the reversals in New York or selling the reversals in New York, and then the London close can many times trade up there one more time or down below one more time to knock out their stops before moving in the anticipated direction.

[34:07] So if you see that occur, step right in there again. If you're looking for a bullish New York session reversal and London close comes down below the New York low again, I'll step right back in there and buy it again. Many times you'll get really wicked low pricing and price quickly moves away in the opposite direction. Everything is reversed on the sell side. But as you see in this example, the reversal occurred on Wednesday, and at London close the reversal occurred at a higher time frame discount array and was expected to trade higher as a result.

[34:44] London, like New York, can reverse the market. It's not just the London Open that creates reversals. They can occur during the New York session and at the London close. Hopefully I've taught you something here about reversals that will build on your understanding. Some of you are going to be scratching your heads saying, “Well, I need a little bit more refinement.” I'm going to tell you that refinement comes with time. It comes with many examples. It also comes with later months' teachings.

[35:13] That brings us to how to study these reversals. The best place to go is inside your charts. The best practice is to first scour through your price charts for examples of all of them. Experience seeing how they form is crucial. Many times they'll be very similar in a lot of ways, but there are also going to be subtle differences. Those subtle nuances are only learned through individual study. In August, we'll be going through a specific set of templates that will be used for a top-down approach leading you into a reversal mindset.

[35:48] These are the eight reversals I look for, so you'll know what to be looking for based on that specific criteria. I understand some of you would like to have 50 different examples, but you don't need 50 different examples. You simply need to understand the concept, go into your charts, and see it for yourself. Study the time of day. What was the market doing? Pick one pair, go back over the last three months, and outline where the reversals occurred. What was the context? What did price go up for in terms of buy stops?

[36:19] What did price go down for in terms of sell stops? Until you go through your charts yourself, you're not going to understand that the best teacher you have is your charts, the time you spend studying them, and your own personal note-taking. The apt pupils in this mentorship who enjoy studying price action will build a collection of each reversal concept discussed here and begin seeing how every lesson prior to these concepts fits together. That will aid you in your analysis. Again, as a reminder, we never know for certain what price is going to do next, but we can anticipate generic price behavior that repeats over and over and over again.

[36:58] So until the next lesson, I wish you good luck and good trading.