Day Trading Stop Run Reversals in Forex
Have you ever felt like your entering the market at exactly the wrong time? You see a great trade setting up and enter, only to see the price almost instantly reverse, stop you out, and then run in the direction of your original trade.
If that sounds familiar than you have been the victim of what I call a day trading stop run reversal.
Market makers, banks, and institutions do not intentionally move the price in this fashion to hurt retail forex traders, they do so to profit from them.
Retail forex traders do not create the moves we simply ride them. Knowing this, if we can recognize frequently recurring chart patterns such as stop run reversals, then we can effectively learn to day trade these reversal patterns.
Let examine this pattern more in depth and explain the process, order flows, and supply/demand surrounding these trade setups.
Stop hunting is something well known in the forex market, but the reasons behind “stop hunting” are not as well know. What is the real reason behind these moves just beyond a major area of support/resistance and then a complete rejection?
Quite simply put, large banks and financial institutions have to move huge sums of money and want the best price possible.
If they want to go short the GBP/USD for example, they will run the price up past the previous high by a few pips or more, and trigger the stop losses they know are lurking just beyond previous highs.
This gives them a “supply” of orders to meet their “demand”. Additionally selling into all the buy orders (stop losses) allows them to move large sums of money without spiking the price in their expected direction providing a far better overall entry price.
Another factor supporting the stop run reversal setup is that of the breakout trader. Most of you reading this have tried or are currently testing some type of breakout trading strategy. It’s a commonly used strategy/idea, and thus it becomes another consistent form of liquidity smart money uses to their advantage.
Knowing this, not only does “smart money” get the orders from those stopped out as in the example above, but they also have all the people buying the breakout (supply) which only gives them more orders to sell into to meet their demand.
As the larger bank or institution moves the price down following the stop run, they know that all those that bought the false breakout higher will have to begin closing the position for a loss.
They move the price up into an area of huge supply (stop location, as well as people buying a breakout) and thus fill their demand.
After the breakout begins to reverse, the breakout traders are forced to cover their position (sell) and thus they fuel the institutions short trade even more aggressively to the downside.
What a beautiful trap…if you’re on the right side of the market 🙂
So how can we profit from this setup, instead of being taken advantage of by it?
First, we must identify a valid manipulation point in the market.
We then wait for that level to break by at least 3 pips to initiate the stop run followed by a confirmation candle.
This forex trading strategy is similar in many respect to trading an area of support or resistance but much more powerful.
The fact is, only large institutional order flow can create this type of whipsaw movement in the market.
Knowing this, if you can learn to track smart money, you’ll have a much higher probability of success. Let the market show you what it’s doing first, stop trying to be the first in and just ride smart money’s wave!
1-Hour Stop Run Reversals
1.) Notice how the market retraces to a previous intraday swing high, briefly breaks it and is quickly rejected. Additionally, the candle that broke the previous resistance closes as a nice reversal candle before pushing towards lower prices.
2.) Example #2 there is a nice double bottom that already formed. As the price looks to make a third test of this level it accelerates threw it and is quickly rejected.
As with example #1, the candle that broke the support closes as a nice reversal candle formation and the price reverses up.
3.) As the market approaches the previous high it actually test and breaks the level a few times. Finally, there is a strong bearish reversal candle that closes. As with the previous examples, the market then continues down after the stop run of the previous high.
While there is no such thing as the holy grail of forex trading strategies, this setup does massively improve your reward to risk potential which is the biggest key to profitability in my opinion.
Happy Trading,Â
Sterling