Examining Rejections - Probability of Success

28 oct. 2021

Hi Traders. Today, we are going to discuss about Type 1, Type 2 & Type 3 Rejections that I personally examine prior to taking any Reversal setups. Are you someone who has multiples reversals strategies, but often when the trade lines up, you find it difficult to determine whether you should pull the trigger or not? If that's the case, there are two possible issues you are facing

A. You did not back-test the strategy
- Backtesting gives you to necessary confidence to take any setup without hesitation

B. You do not know exactly what you are looking for
- Due to the lack of research, backtesting and experience, you find it confusing to identify whether an entry trigger is valid or not

Below, I will be breaking down the logic behind these 3 different types of rejections, and which one had proven to give me a better Probability of Success over the long-term

Type 1: Price just tap a Resistance zone , then begin showing signs of exhaustions
• This type of rejection often attracts traders who are FOMO (Fear of Missing Out) or have the sense of urgency to quickly get involved
• My data shows that Type 1 rejection gives the least success rate, often price tends to move sideways after the rejection, then slowly grind back up digesting the entire candle
• It is the weakest rejection due to the liquidity purposes (not always). It is not easy for a market to completely reverse into the opposite direction without attracting traders onto the wrong side

Type 2: Price pierces through a Resistance zone , then showing strong sign of rejection closing back below
• e.g. Pin-bar, Doji , Spinning Top , etc
• It usually wick through the previous high, and wipe off traders who place their SL just slightly above the structure
• This type of rejections is often what I personally enjoy trading the most too, as it shows extreme price disagreement.
• Price attempts to break above the Resistance zone , but faced immediate opposing pressure defending the price zone, showing solid rejection

Type 3 : Price closes above the Resistance, then pop back below
• Commonly referred as a "Fakeout"
• The logic behind this is great as well. Price closes above a Resistance zone attracting more fresh buyers in, Buyers who bought at low would scale-in, Breakout traders would try to chase the aggressive buys
• All of a sudden, buying pressure turns off, Big Boys step in immediately reverse the market into the opposite direction
• Think about the amount of selling volume requires to shut down that huge amount of Bullish momentum
• A very reliable reversal entry trigger too


In this example, I am using a Bearish reversal scenario. It works the same way in a Bullish reversal environment too.

Comment down below which one is your favourite rejection trigger?

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