Early Entries Using Reversal Candles
A Simple But Very Effective Entry Technique
We do our best to keep our style of trading simple. We use price, volume and a few moving averages to help us identify low-risk entry points within a valid basing pattern. Most stocks we trade are near 52-week highs and have something exciting going on, such as increasing quarterly earnings or sales growth, strong industry group or a recent IPO.
In the spirit of keeping it simple, bullish reversal candles are one of our go-to entry signals in stocks that have formed a valid basing pattern. We love them because they are fairly simple to identify and work really well when combined with moving averages.
Every night, we run a reversal candle scan on our main watchlist looking for reversals off the 20-day EMA or 50-day MA. Shorter term pullbacks near a rising 10-day MA can be bought as well. Also, stocks must first pass through several filters to make our watchlist, which keeps the list manageable.
When these trades work out, the low of the reversal candle is not violated. Sometimes great setups fail, so don’t be discouraged when stopped out. If stopped out, keep a positive mindset and patiently wait for a new entry point to develop, as long as the pattern remains valid.
Below are a few examples of how we used reversal candles in trades during the past few months in our model portfolio. In these examples, a reversal candle for us generally takes out a few days of lows if within a base, or at least the prior day’s low if looking at a 3-5 bar pullback in a swing trade. The close should be in the upper third of the day’s range.
$ROKU’s gap down reversal generated a buy signal.
$FNKO reversed after undercutting the prior day’s low and closed at the 50-day MA. We entered a few days later.
$SE reversal candle in between the 10 and 20-day MAs.
We bought $CYBR over range highs but the reversal on 7/9 was nice (a bullish gap down reversal). We placed our stop beneath the low of 6/24, which was also a weekly low. Once could have placed a stop beneath the 7/9 low as well.
$INSP produced a few low-risk entry points on reversal candles.
Simple concepts work. The bullish reversal candle is fairly easy to identify and can often lead to entries well below the obvious breakout at 20-day or 50-day highs. Depending on the reversal candle, protective stops can be set fairly tight, allowing for pretty good reward-to-risk ratios.
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