Welcome back to the Rookie blog. Last week we were talking about the blowoff phase which is the final phase in this series of market types and conditions. This phase has certain mannerisms that present us with a unique opportunity to profit and also is a very aggressive movement. Because of that, we need to have a directional trade to take advantage of the increased movement.
Before we get into the way to profit from this movement we need to be able to recognize this phase and know when to enter the trade. The blowoff is characterized by extremely high volume, I mean it has to have unusually high volume, definitely more than its immediate surrounding average. I will show this type of volume in the video example at the bottom of the blog post. In addition to the high volume we are looking for ideally a larger body candle and we are looking to extreme limits for the entry into this type of trade. We can use certain indicators to tell us if something is at an extreme limit. It is nice to have all the above-mentioned items to tell us that we are in a blowoff scenario but you may not always get all the above items together but for it to qualify as a blowoff it must have high volume and a wide range.
Now that we can recognize the pattern we need to know how to trade it. As I mentioned before you can use any trade that benefits from a large directional move. We have to wait until the strong side has exhausted the weak side before jumping into our directional trade and that is the basis for the blowoff trade. One will see the volume increases and the candle growing and then once the turn presents itself then it is time to jump in and collect. It is often easier to see blowoffs on shorter time frames but they do actually occur on every time frame.
Last week I talked about my favorite directional trade and that is called the risk-reversal. I like this trade because it is aggressive and if we are right on the direction we get paid handsomely. The issue is that if we are wrong on the direction we have some risk and depending on how the trade is setup that risk can be a lot or a little. You see with a risk reversal there are two possible types of risk, debit risk, and strike risk. Again, how much risk there is on the trade depends solely on how it is setup. In the video below I am going to show you a blowoff on AMD and I am going to build a risk reversal and explain the total risk and the reward in the trade as well. Please remember this is an advanced and aggressive trade so you should paper trade this trade many times to understand the nuances and to ensure you understand what to do if the trade goes against you.
Check out the video below and leave some feedback…
Happy Trading All,