How To Trade The Cut And Reverse Trade

How To Trade The Cut And Reverse Trade Introduction

In this blog post series, we will look at how to trade the cut and reverse types of trade. The cut and reverse trade is a trade where we expect scenario A, but as we collect more and more information, we realize that the opposite will most likely happen. Similar trade happened to trader Joe, shared in this article under the “Strategy That Failed To Have Follow Through” section. So what is essential when we cut and reverse the trade? Since this decision is usually made on a spot, we must have clearly defined rules for turning our opinion upside down without overtrading our ideas. Clues such as personality shift, absorption, and LVN’s are crucial information that can trigger our sudden cut and reverse flip trade. Let’s explore those clues in greater detail.

Two Cut And Reverse Trade Examples

The Dax Cut And Reverse Trade

3 Signs To Cut & Reverse A Trade

In the example below we can see DAX approaching a key zone (yesterday’s VPOC) we wanted to fade. Our goal was to play the reversal after the intraday exhaustion move as soon as we were given a sign. Once the pin bar appeared, this was our sign with the price ladder confirming action that we can get short. But as soon as we got in, the market started to exhibit a sign of strength, not weakness. Here are the clues that led to cut and reverse trade:

  • when sellers approached the previous low, there was no big selling initiated and we have expected that
  • when sellers approached the interim lows, the bid started to absorb the light selling
  • meanwhile, our VPOC for the day has shifted higher into our reversal zone, which is not a sign of a snap reversal, that is a sign of accepting the value
  • seeing an LVN left behind if this picks up through the highs should be no surprise since we are the area of yesterday’s VPOC and our intraday VPOC has just migrated to where we are now

Now with all these signs in a mind, we are looking for heavy selling to start as soon as possible. The more time we spend here, the less likely we will get our reversal. We are aware of the catalyst that would invalidate our reversal trade and signal a cut and reverse trade: a quick jump up that comes exactly at 3:34. That quick jump up is a sign that we should:

  • a) cover our position
  • b) cut and reverse with a stop below the LVN
DAX cut and reverse trade example showing volume profile with P shape profile and chart profile with agressive trending price action
DAX cut and reverse trade example

The Bund Cut And Reverse Trade

How To Cut & Reverse When Heavy Selling Dries Up

In this trade example, we are looking at the Bund. Originally we wanted to sell and follow through with the lower prices but the moment the sellers really stepped in, something changed. Here are the clues that led us to cut and reverse the position from short to long:

  • heavy selling has stopped the moment we touched the 166,30 – the first sign of a personality shift (we have turned the heavy selling into very little selling into the lows)
  • we have absorption from the sell side, someone passively absorbing at 33 but no one is willing to hit the 32
  • an attractive bid of 1000 teasing the sellers but nobody is willing to get closer to the bid, again signs of sellers not willing to hit lower prices
  • when the absorption level fails at 33, that is the first crack in our plan to go short
  • we start to hold above 33 and start to move up, then a little flick to test the 33 but again, no one selling below that point

So where and when was the best access to cut and reverse? That last scary flick back to 33 was your chance to get the 34 or 35. Here is the access point in greater detail explained at 5:15.

Bund chart showing the area of cut and reverse trade with sellers in control, market looking lower with large red candle being the reversal point
Bund chart showing the area of cut and reverse trade

Thanks for reading.

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Thanks for reading again and until next time, trade well.


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Written by Jaroslav Kohout

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