TL;DR: A step-by-step guide in how to trade reversal patterns with the strategy defined by legendary trader, Jesse Livermore. 

This trading strategy is so simple that a 6-year old can understand it. (Seriously)

Jesse Livermore, a famous stock trader in the early 20th century, earned a massive million in a single trade. He designed this strategy by analyzing price action and volume alone.

He called it the one-day reversal strategy, which works best in a daily timeframe.

Let’s break down the steps for you. Make sure to stay till the end, as we’ve included a few extra tips that significantly increase the win-rate and profitability of the original strategy.

Steps to to Trading Strategy by Jesse Livermore

Step 1: Identify a strong trend

Look for a stock that has been trending strongly in one direction for a while. It could be an uptrend (higher highs and higher lows) or a downtrend (lower highs and lower lows). Wait for a reversal pattern to appear.

Trading against the trend is risky. Many new traders lose money because they predict reversals without evidence.

Step 2: Find Favorable Long Position

In the daily timeframe, look for the low of the current candlestick. It’s favorable if it falls below the low of the previous candlestick. Then wait for the closing price. It must be higher than the closing price of the previous candlestick to confirm a favorable entry.

Step 3: Observe the volume

Volume is crucial for confirmation in this strategy. The total volume of the current day must be higher than the previous day. High volume indicates increased participation and confirms the strength of the trend.

Step 4: Stop loss and take profit

Set a stop-loss order slightly below the low of the previous day to limit potential losses if the trade goes against you. Additionally, set a take-profit level using previous support or resistance levels.

Make sure the risk/reward ratio fits your trading style before placing your order. Don’t enter a trade if the setup isn’t favorable for you.

Step 5: Find Favorable Exit

Apart from using the stop loss and take profit points, Jesse suggests looking at the high of the current candlestick. If it’s above the high of the previous candlestick and the closing price is below the close of the previous candlestick, it may signal another reversal pattern and an upcoming downtrend.

Again, the total volume of the current candlestick must be higher than the previous day to confirm a strong reversal tendency.

Extra Tips to Increase Win-rate and Profitability

Tip 1: Use TradeDots Indicator for confirmation

The TradeDots indicator labels reversal points on charts by analyzing the price action of the asset. If the current candlestick shows a TradeDots label, it’s more confident to confirm it as a reversal point.

Try TradeDots indicator for free

Tip 2: Don’t overtrade and be patient.

Don’t trade just because you feel there’s a potential trend reversal. Always wait for the signal to be confirmed. Rushing into a trade driven by emotions can expose you to high risk.

Tip 3: Manage your risk.

Only risk a small amount of money on each trade. If you’re trading derivatives, don’t hold over 2% of your overall portfolio in each position. Never bet or speculate on market news.

Bottom line

The one-day reversal trading strategy isn’t foolproof. Always control your risk and use stop loss and take profit with discipline. Journal your trades and backtest your strategy on different assets. Becoming a smart and profitable trader takes effort and time, so don’t skip the tedious steps that separate winning traders from losing ones.

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Disclaimer: The information provided in this article is for educational purposes only and should not be considered as financial advice. Trading involves risk, and it is important to conduct thorough research and seek professional guidance before making any investment decisions. Prospective investors are encouraged to perform their own due diligence or consult a financial advisor before making investment decisions.