One of the most high probability trades occurs when a strong reversal is in effect. Few people are even aware the trend has changed direction, but as they realize it, it often creates another strong surge in price. If you know what to look for, you can get in before the crowd and ride the next price wave on a high probability trade.
The Snap-Back Strategy Setup
The snap-back refers to the first very strong move against a prior trend. It must be strong enough to indicate at least a short-term change in direction, and that another strong move will follow in the same direction as the snap-back.
Snap-backs are usually two or more price bars, although there is no fixed number of bars that works best.
Figure 1 shows a snap-back lower and a snap-back higher. The snap-back is an aggressive sharp move against the prior direction. The price falls away in the first example, and rallies sharply in the second example; it is only a snap-back if the movement is very strong (no drifting) and it is the first very strong move against the prior direction.
The strategy can be applied on anytime frame.
Figure 1. Snap-Backs – EURUSD
The time and price scales have been removed in the Figure 1, as the total movement or time isn’t of concern, rather, only relative movement matters. The two snap-backs marked clearly show aggressive first movement against the prior direction. This could be a 1-minute chart or a weekly chart, the set-up is still the same.
Taking a Trade
Figure 1 shows the “snap-back” we looking for. Following the initial snap-back move there is usually a pause–often moving mostly sideways–which is then followed by another strong move in the same direction as the snap-back. This can be thought of as “snap-back, pause, and follow-through.”
The pause provides the entry point. It must be two or more bars, which shows the price has actually slowed. The exact entry point is beyond the scope of this article, although the strategy is still highly effective if entering anywhere in the pause. If you have a bit of patience and don’t mind missing the odd trade, you can let three (or more) bars develop on the pause, and then place an entry order near the top of the pause if the snap-back was lower, or near the bottom of the pause if the snap-back was higher.
This keeps risk extremely small and maximizes return.
Figure 2. Snap-Back Trading – EURUSD
Figure two shows a snap-back lower, followed by two pauses which occurred back-to-back. Both pauses are fine to enter short on, as the expectation is still that the price will continue to drop.
The rectangles mark ideal entry areas. The second pause provided ample opportunities to get short near the top of that pause.
Stops and Targets
If trading binary options you don’t need to worry about stops and profit targets, although you will need to choose an expiry time. Choose an expiry time that is about 5 to 7 “bars” away from your entry time. For example, if you are monitoring a 1 hour chart, your expiry should be 5 to 7 hours away (5 to 7 bars). This gives enough time for the price to follow-through, but not enough time for it to start reversing. You may wish to adjust this based upon any tendencies in the price action at the time of the trade.
If trading traditional markets, place a stop loss just above the pause in a snap-back lower, and just below the pause in a snap-back higher.
The target is based on the original move. In figure 3 we measure the profit based on the high of the first red bar (start of down move) to the low of the first pause. If that is 100 pips, then we are looking for the price to continue to drop 100 pips from the top of the first pause.
In Figure 3 I have drawn a trend line to provide the distance (high of down move to low of pause case) of the snap-back. The line is then simply copied and moved (top of line at top of first pause) to provide the target for the trade.
Figure 3. Stops and Targets
These sharp moves against the trend catch most traders off guard, which is probability why it is such an effective trade. You will need to determine for yourself, possibly with the help of indicators, what exactly constitutes “strong” or “aggressive” to you. Define your own personal parameters for how you will handle these situations. Keep in mind, the profit target is set regardless of your entry point. You may wish to hold a trade a bit longer if the price is moving well in your favor, but avoid getting greedy–usually the method outline for profit taking is quite effective.