The Ultimate Smash Bar Reversal Strategy

Reversals are one of the better market plays for a trader. The market heads lower at a fast clip, short sellers pile on, and then, suddenly, out of the blue it stops, changes direction and blasts off.

For the astute trader, catching a reversal in price, at the right level can work out highly profitable.

The Ultimate Smash Bar Reversal is a classic reversal strategy. It’s a simple one-bar pattern that works well across all liquid markets.

Let me introduce you to this highlight recommended trading technique.

 

Larry Williams and the original Smash 

But first let’s take a quick detour and talk about the original Smash Day pattern in Larry Williams’s book, Long Term Secrets to Short-Term Profits.

To date, this book is still one of my favourites.

I’ve got a fondness of Larry’s trading style, devoid of bells and whistles. If I’ve ever considered anyone a trading ‘guru’ for me it would be Larry.

But enough ass-kissing here’s what he says about the original Smash Day.

The siren song of greed is what keeps the public on the losing side of the ledger in this business. That is bad for them but good for us if we can figure out what it is that gets them to bite, what sucks them into wrong decisions. One such “event” is what I have labeled smash day reversals. These are days where the market has a major break, up or down, this violent action pulls the public in to the foray..…….. To the chartist, the public, or professional technical analyst, this looks like a breakout to the downside, thus the extreme selling brings them to the table. Sometimes they are right, but usually dead wrong if the market immediately reverses itself.

Larry Williams

If you’re wondering what The Smash Day actually is, then here it is, it’s this.

  1. The latest day close must be below the previous day close
  2. Place a buy stop order above the high of the latest day
  3. If not triggered by the next day then cancel the order

Yep, that’s it!

In his book, he explains ways to improve results, with such thing as the Trade Day of the Week, which will be a topic for another day.

For now all that needs to be said is that the Smash Day is just a daily close below the previous day close.

 

My own interpretation of the Smash 

Williams has a preference for bar charts, personally, I prefer candles, they’re much easier on the eye. So I altered his original method to this.

  1. The latest bar close must have a lower close than open
  2. Place a buy stop above the high of the latest bar
  3. If not triggered within one bar then cancel the order

Anyone familiar with candlesticks knows a bar with a lower close than open is a red candle. 

So, really the setup is just placing a buy stop a few points above a single red bar. Not exactly rocket science heh?

 

Different markets different results

Now before you start jumping up and down, thinking you’ve got the secret of the markets, let me stress that the Smash Bar is far from perfect.

From my own experiences, the long Smash Bar works best:

  • on stock indexes and selected commodities such as gold
  • it doesn’t work well on lower timeframes
  • or when markets are in freefall

But this article isn’t about the Smash Bar.

Main

The Ultimate Smash Bar 

The USB is a very potent candle formation. Yes, it’s a red candle.

But it also has a long protruding wick.

The other characteristic is a short real body with a close near the low of the bar.

Below are a number of typical Ultimate Smash Bar Reversal long setups you see time and time again in the market.

Many of you will recognise it as nothing more than an inverted hammer.

The Ultimate Smash Bar

Filtering process

Deciding whether a bar with a long wick is a USB (or inverted hammer) can involve a little discretion.

Ideally, I’d avoid candidates that have no real body at all. By that, I mean the classic gravestone doji, where the open and the close are of the same value.

Also, make sure that any setups you take have real bodies in the bottom half of the range. That is the opening price must be in the lower portion of the candle range.

 

Ultimate Smash Bar Reversal trading rules

  1. The bar must be red
  2. Close must be in the lower quarter of the bar range
  3. Must have a real body in the lower half of the bar range
  4. Place a buy stop order two pips above high
  5. Place stop loss at low of the bar
  6. If not triggered by close of next bar then cancel 

Ultimate Smash Bar Long Setup

Final Thoughts

If you want to short-term swing trade, then the USB is a nice little addition to your trading armoury.

These setups work best on daily charts.

Some of the best trades I have were from this simple pattern which often signals a significant market bottom.

The biggest problem with this pattern is it doesn’t occur near frequently enough. So another technique you might want to check out is the volatility breakout strategy the Harami Inside Bar pattern.

 

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John Scott
John Scott has been trading CFDs and FX since 2003. His favourite markets are the Dow 30, Gold and the GBP/USD. John believes short-term price action trading is the best approach for beginners to trade. Tradeneophytes is his humble attempt at helping new traders reduce the learning curve to trading success.
Posted in Technical Analysis.

John Scott has been trading CFDs and FX since 2003. His favourite markets are the Dow 30, Gold and the GBP/USD. John believes short-term price action trading is the best approach for beginners to trade. Tradeneophytes is his humble attempt at helping new traders reduce the learning curve to trading success.

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