Many on the channel hear us talk about possible “Doji Reversals” or sometimes we name them after a long term trader in the chat room “Mack Reversals”, who frequently points them out for us. In the thumbnail of this post we give a small example. These “Doji Reversals” are where the market makes a low/high with in a defined time frame and then quickly reverses leaving a long tail or candle wick – the longer the better the set-up. The idea is that on the bar after this candle, it breaks the high/low of the Doji, it then is a signal to enter a position. If this set-up is at a support area, trend line or a Bollinger Band extreme point, it makes this “Doji Reversals” even a stronger possibility of a market reversal. It is also good if the color of the bar is the same color as the reversal direction.

Further explanation is to what you are looking for is a 10 min price bar that is on the lower (or higher) bollinger band that starts at price A, spikes down a decent amount and then quickly jumps back up to price A before the end of the 10 minute bar. Usually the market markers will wait until the last second to jump the price back up.

Then in the next bar, the price may go down below point A, but it wont be by much, but this is done by the market makers holding off there buying to scare people into selling cheap one final time before the market maker takes the price up. (All trading systems seem the same if they are successful, they seek to parrot where the big players are trying to take the market. The big players have huge orders they work all day and try to manipulate the market so they can get the best price for their orders.

How do big players manipulate the market up or down? Well in Jesse Livermore’s book Reminensces of a Stock Operator he details the process. Its actually not that hard. A big player with a lot of money starts buying stocks at lows building a core position, eventually the stock turns higher. At that point momentum traders (like Mack) jump on the trend adding their buying power to increase the move. When the move has gone high enough (in Mack’s thinking at the top of a bollinger band), the big player sells high to replenish his big money supply. Thus the stock is turned back with a doji and high volume selling. Next traders like Mack catch on and get short. Eventually the stock gets to the lower bollinger band and the big player buys his stock back and turns the stock higher. This point will always be a higher low in price. Eventually the stock can stairstep quite high (witness the 70% rise off the march lows without a lower low).

So look for these “Doji Reversals” in your trading.