Reversal Trading Strategy

We mentioned on Thursday that we would post the guidelines to this strategy over the weekend. This strategy may not be appropriate for non-technical traders and only traders who can assume the risk of trading against the prior trend should consider trading this technique. Anyone who finds this strategy of interest should first backtest and papertrade it on stocks they trade to verify the strategy's appropriateness for them. Chart Signals and Dave Johnson offer these guidelines only as an illustration of how technical indicators can be combined into a set of rules for a trend reversal strategy and make no representations regarding the profitability or completeness of the following guidelines and are not liable for any losses traders may incur. Individuals traders assume all liability for any losses they may incur. Reversal Trading Strategy Overview The objective of this short term trading system is to identify high probability reversal points by combining potential double bottom or slightly lower low or a double top or slightly higher high chart patterns with short term candlestick reversal patterns and a negative/positive divergence in the stochastic indicator (14/5 setting). An eight day MA is included primarily as an exit/trailing stop indicator, but also gives the user a smoothed view of the short term trend. Rules Setup Entry: 1 - There must be a double bottom or slightly lower low chart pattern for an upside reversal. For downside reversal there must be a double top or slightly higher high chart pattern. 2 - There must be a bottom/top candlestick reversal pattern present on the second high. 3 - There must be a positive divergence for an upside reversal and a negative divergence for a downside reversal in the stochastic indicator. Buy Signal: Buy on confirmation of the candlestick pattern. Exit: 4 - Initial stop loss is set 20 cents below the low of the candle pattern for an upside reversal and 20 cents above the high of the candle pattern for a downside reversal. 5 - Once the trade produces a profit of $1.00, stop loss is moved to breakeven (the entry price). 6 - Once the eight day MA moves past the breakeven point the eight day MA becomes the trailing stop. The trailing stop is the Target Price.