How to Trade a Key Reversal Bar

12/05/2013 6:00 am EST


Jeffrey Kennedy

Editor, Commodity Junctures and Trader's Classroom

By employing the guidelines below, your trading style becomes one of ready-aim-aim-aim-fire, says senior analyst Jeffrey Kennedy of Elliott Wave Junctures.

Too often, people take a "ready-fire-aim" approach to trading—which is obviously a backwards way of doing it. A trade setup is different from a trade trigger. Today, we’ll talk about what turns a setup into a trigger.

A trade setup that I'm always on the lookout for is a double close key reversal outside bar combination.

A double close key reversal forms when prices make a new extreme, yet close above or below the prior two closes. The outside bar portion of this formation is self-explanatory: The current bar's high and low are above and below the previous price bar's high and low.

It is important to remember that this bar pattern is a setup only—and not a signal to immediately take a trade. For this formation to become tradable, it must prove itself by trading beyond the key reversal bar's high or low. If the high of the key reversal bar is penetrated, then the low of the key reversal bar may act as an initial protective stop for longs and vice versa for shorts.

By Jeffrey Kennedy, Editor, Elliott Wave Junctures

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