Day Trading Stop Run Reversals in Forex

Day Trading Stop Run Reversals

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. So 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 the “supply” of orders to meet their “demand”. Additionally selling into all the buy orders (stop losses) allows them to move large sums of money and not move the market down as fast as they would without all this “supply”, thus giving them a better overall entry.

Another factor supporting the stop run reversal trade setup is that of the breakout trader. Many traders buy the breaks of a previous highs and sell the breaks of previous lows. Knowing this, not only does “smart money” get the orders from those stopped out 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. Additionally as the larger bank or institution moves the price down after a stop run reversal setup they know that all those that bought the false breakout higher will have to begin closing the position. Its a beautiful thing for those moving large sums of money, 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, then after the false break is seen, the breakout traders are forced to cover their position (sell) and thus fuel the institutions short trade. Additionally by the time this is seen by most retail traders the demand becomes so high the price has no choice but to continue down!

So how can we profit from this setup. First identify previous major intraday swing in the market. Second wait for that level to break by a few pips at least and then quickly retrace back, closing as a reversal candle formation off that area of support/resistance. This forex trading strategy is similar in many respect to trading an area of support or resistance but much more powerful! Only “smart money” can move the price up and then quickly reject it which should tell you something, this is a “smart money” market move! Knowing this, jumping on the wave their creating results in some powerful day trade setups. Let the market show you what its doing first, stop trying to be the first in and just ride “smart moneys” wave!

CHART -

1.) Notice 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. The market then continues down nicely.

2.) In 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 retraced. As with example #1 the candle that broke the support closes as a nice reversal candle formation. The market then continues 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, of which you would short below that candles low. The market then continues down after the stop run reversal of the previous high. When the first break does not get immediately reversed as in this example extreme caution should be used or avoid the trade all together. This is just telling you the selling pressure in this case is not as strong as a “standard” stop run reversal setup.

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