The Key Day reversal strategy signals the reversal of a trend and comes after either a strong uptrend or down trend accompanied by an increase in trading volume.
A reversal like this can sometimes be a technical trade and may coincide with a major support or resistance level or a Fibonacci level.
For a reversal from an Uptrend, the market opens above or near the Close of the previous day, and then falls sharply to make the key reversal candle and closes lower than the previous day’s Low.
For a reversal from a Downtrend, the market opens below or near the Close of the previous day, and then moves up to make the key reversal candle and closes above the previous day’s High.
The example below shows a daily chart of the FTSE 100. You can see that the overall trend is an uptrend.
The reversal candle also coincides with a major resistance area. If you look back you can see that price previously touches the resistance level before bouncing off lower.
In this case, the red reversal candle opens just at the close of the previous day, shoots up to a high and then reverses and closes below the low of the previous green candle.
1. On break of the reversal candle
When price breaks the previous days close.
- On break of the high of the reversal candle if going short or on break of the low of the reversal candle if going long.
There are several exit strategies you can use depending on your preference.
- Exit and take profit when a green up candle on the 4 hourly chart.
- Exit and take profit or half profit on a Doji candle.
- Use a trailing stop and let the trade run.
This type of trade can often occur if there has been a major announcement which has surprised the markets. If the announcement is a major change in monetary or fiscal policy, then the reversal trade can continue to run. The reason for the reversal should be taken into consideration when planning your trade exits or take profit levels.