Use this technique to identify trend reversal with heightened accuracy!
If you’ve been practicing technical analysis then, I’m sure that you already know that ‘the trend is your friend’. You must also be familiar with its practices and must be aware of the most significant ways to grow your portfolio i.e. identify the correct trend and follow it effectively. However, as the saying goes, ‘no trend will last forever’; there will always be a moment when the trend that you are trading, would reverse and pave the way for a new trend to start.
Ample studies and research, as well as set-ups, have been carried out in the field of technical analysis, which can tell traders or market participants whether a trend is close to changing its direction and also, confirm that a reversal has indeed taken place or not.
Now, let’s know why is it important for a trader to know about an upcoming reversal? Firstly, if a trader is already holding a position on a trend, he/she would want to exit it before the reversal. Secondly, reversal is a time when a new trend emerges. If one reads it correctly and spots it at the right moment, he/she will get an opportunity to join the trade early and gain more.
Before moving onto the crux of this reversal strategy, it’s important to understand the concept of higher highs & lower lows. If you are not aware of higher high and lower low, then let me first brief you about the concept. A security or a stock is said to be making a higher high when the current high of security or the stock is greater than its previous bar and similarly, a lower low is witnessed when the current low of the stock or security is lower than its previous bar.
Here is an illustration: In figure 1, we can see higher high, as the highs of the last candle is greater than its previous candle i.e., first candle high is Rs 100 and second candle high is Rs 103. whereas, in figure 2, we can see lower low as lows of the first candle is Rs 100 while of second, it is Rs 97.
I hope by this time, you would have got a fair idea of higher high and lower low! Let’s move ahead now!
If you are a trader, you must have noticed that most of the candle patterns consist of one, two, or three candles. However, this reversal technique, which we are going to explain, takes a long time to unfold, and hence, they are extremely valuable. This longer-term pattern technique is known as ‘record session’.
What is a record session? Take a quick glance at the above example which we have shown i.e. when a candle makes a higher high. The Japanese call it a ‘record session high’ and when a candle makes a lower low, it is called a ‘record session low’. So, when there are eight to ten record sessions i.e., almost eight to ten consecutive higher highs or lower lows, then it increases the possibility, indicating that the preceding trend would change.
So, now, one may ask what is the relevance of numbers 8 and 10 is. Eight to ten record sessions are so important in Japan that they have been described as being the 'bones of Sakata’s body'. This means that just as the bones, or skeleton of a person’s body is its foundation; similarly, records sessions are the foundation or the essence of Sakata charts, says Steve Nison in his book.
Now, the next step is how to count the record session highs. So, let’s look at some of the illustrations (bar chart).
To begin with, we need to confirm that a low price for the move has occurred. In the above example, the low has been confirmed just before the candle, where marking 1 has been done. Meanwhile, the candle marked with no. 1, has a higher high. So, this is your record session high 1, followed by record session high 2, and so on. We have got almost 10 record session-highs.
Now, let’s check exactly what happened with this stock after the record session high count of 10.
The stock has started to fall after the record session high count 10.
The same philosophy, but in reverse, should be considered for record session lows. However, one important rule to remember is that only higher high and lower lows would be considered for record session count. Besides, it should be kept in mind that the record sessions should be almost consecutive as the concept of record sessions indicates that the security becomes overbought or oversold. However, a few days of consolidation can be ignored. Further, major reversal candlestick patterns such as a bearish engulfing candlestick pattern after a record session high and the formation of bullish engulfing after a record session low could add more relevance to this setup.