Every trading method will have parameters for entries and exits. Some traders will decide to wait for confirmation and for
others, the fact that price is at a specific level is all the confirmation they need. This article looks at a great reversal pattern to use for confirming short trades.

I like to trade from higher time frame levels,mainly from the daily chart but I will always wait for confirmation before
considering an entry. Stops based solely on a daily level can be quite large and also price might not be ready to turn yet. Waiting for a reversal offers a safer approach to trading and helps to minimize losses and increase the reward to risk ratio on trades.

Considering the trend

To consider a short I want price to be at a level which I have objectively identified as supply on the daily chart. A level which I believe price will fall from based on a previous move from the same level.

When price hits a supply level the trend will usually be up. An up trend will often have higher highs along with higher lows and will sometimes have demand levels which would have formed during the up move. In an up trend you would expect demand levels to hold and supply levels to fail, so whilst there is still fresh demand, or higher lows,shorting could be dangerous.

Traditional Short Confirmation

Lower Highs and Lower Lows

A common method of classifying a downtrend is when lower highs and lower lows are observed. When this pattern is seen, a down trend is said to be well under way which confirms the intended direction. However, price will have often moved a significant distance from the turning point identified (supply), which can reduce the potential profit for the trade and increase the stop loss required.

Trend Line Break

The break of a trend line is another common signal used to confirm a change in market direction and an entry. Whilst this can
work, one must be careful where the break occurs. If price breaks an upward sloping trend line but drops right into demand, then that not a great place to short. Also if price fails to break the most recent low, the trend line break entry may not yield the best results.

The Short Reversal

This price pattern under consideration essentially has the following structure: High, Low, Higher High, Lower Low, Lower high. The emboldened lower low is a key part of this pattern and I’ll explain why.

As price is rising and making higher highs many assume the trend is still in tact and would expect price to move higher. When price makes a lower low during the identified uptrend, this is a sign that price is getting ready to turn. The higher high tricks buyers into longs before dropping price down past the prior low. If buyers were still in total control price should ideally have put in a higher low.

The key thing to look for is how price broke the prior low and if a demand level was also broken. If price breaks the prior low
in a strong fashion, then we have confidence that price will turn nicely. At this point I’ll look to find a supply level on the same time frame from which to short. With a strong down move there is going to be a big supply/demand imbalance somewhere and that is where I want to short from.

With the pattern formed it’s now clear that buyers are overwhelmed and we are safe to short. This pattern and entry type is safer
than some of the traditional methods mentioned above and it will also get you into a trade earlier.

The supply level within the reversal pattern has a large red candle leaving the level and price breaks the prior low without any
trouble at all. When price returns to the supply level we are good to short.

The image below shows how far price went after this pattern formed.

Like most patterns this can be seen all overthe charts. This price pattern works but it is only to be used near higher
timeframe turning points.

I hope you found this useful
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