- The ‘M’ Reversal needs one peak to be formed outside the upper Bollinger Band and the subsequent peak to be formed within the band;
- The stop loss will generally be placed above the high of the second peak;
- The trader may choose to move their stop as the price moves in their favour using either an x bar trailing stop or alternatively place the stop above new peaks as they form.
Scouring through hundreds of charts a day means that you need to try and keep your mind flexible to different opportunities that exist which can be tricky when you consider the mass of setup types that you may see. One that is relatively easy to spot is the ‘M’ Reversal because of the specific way the price needs to form up in relation to the Bollinger Bands.
The more subjective element is the angle at which the price initially is moving when it breaks out of the bands. By this I mean that this is the type of formation that needs to be accompanied by a fairly aggressive price rise in the lead up to the pattern. If you look through the blog at some of the other ‘M’s (and its long side cousin – the ‘W’) you can see what we are typically looking for.
Whilst this type of trade will always be seen as counter-trending it does potentially allow the trader to place their stop quite close to the entry point which may provide a good risk/reward setup – which is one of the key attractions for reversal trading.
Please let us know any comments, thoughts or questions that you have. Ric and I can both be followed on twitter at RicCharts and DaveCharts respectively.
All the best,