The Bump and Run trading strategy is one of the best reversal trading strategies that you’ll probably ever need to learn. The psychological reason why the Bump and Run reversal is such a powerful pattern is because it takes advantage of the result of excessive speculation. This propels the price too swiftly to the extreme which leads to a reversal.
Moving forward, we present the sell-side rules of the Bump and Run trading strategy:
Step #1: Wait until you can identify an uptrend (lead-in) and then an acceleration of that uptrend (Bump)
We’re breaking down the Bump and Run chart pattern into several steps. The first step is to identify an uptrend and then an acceleration of that uptrend. These two components of a trend constitute the first part of the Bump and Run Reversal.
*Note: A valid Bump and Run chart pattern has the first section of the trend drifting upwards very slowly and in the second part of the trend we need to see momentum picking up and the uptrend moving to the extreme.
Step #2: Draw the lead-in that connects the lows during the first stage of the trend and draws a second connecting the lows during the uptrend acceleration stage
The way you draw the can be a subjective matter because there are several ways to do it and neither of them is better than the other. Ultimately, it all comes down to your experience and understanding of the price action.
Step #3: Sell Entry 1 at the break and close below the first , Sell Entry 2 at the break and close below Lead-in .
In order to maximize our potential profits we like to implement a two entries technique as follows:
Sell Entry 1 once the first is broken. For confirmation of a valid breakout, we like to wait for the candle close below the .
Sell Entry 2 once the Lead-in is broken. Wait for confirmation of a valid breakout we like to wait for the candle close below the .
During this stage, the market is in the process of reversal and the “Run” component of the Bump and Run chart pattern is formed.
The Run phase is identified when the price falls and breaks below the Lead-in which also confirms that we’re in the process of reversing the previous trend.
The next logical thing we need to establish for the Bump and Run trading strategy is where to take profits.
Step #4: Take profit at the Lead-in starting point
The ideal profit target for the Bump and Run trading strategy is at the Lead-in starting point. In other words, take profits at the exact same level you use to draw your Lead-in .
We encourage you to experiment different take profit strategies because the Bump and Run chart pattern can also lead to a severe reversal that can be the starting point of a big .
Step #5: Place initial SL above the swing high created by the uptrend acceleration. Second SL placed above the Lead-in breakout candle
Since we’re splitting our trade into two trades, we’re going to have two protective stop losses. The initial stop loss is placed just above the swing high created by the uptrend acceleration phase.
The second protective stop loss is placed above the candle that breaks the Lead-in .
We’re adopting a very conservative approach here because if we truly have a reversal we consider that the market should not look back. In this regard, we keep our SL very tight.
We also recommend that once your second entry gets triggered to move your initial stop loss in the exact location as the SL2. This will guarantee you that even if you get stopped out on your second entry you’ll still be left with some profits.
*Note: The above was an example of a SELL trade… Use the same rules – but in reverse – for a BUY trade, but this time we’re going to use the inverse Bump and Run reversal.