“Principles of Professional Speculation” written by Victor Sperandeo (Trader Vic), analyzes one of the powerful tophottom reversal techniques. Trader Vic describes this technique, “In an uptrend, if prices penetrate the previous high, but fail to carry through and immediately drop below the previous high, the trend is apt to reverse.” The converse is true for a down trend. This pattern is also called “spring.” The 2B setup looks like a micro “M” pattern and signals trend reversal when prices stop making higher-highs in an uptrend.

The 2B pattern rule is when prices make a new high or new low; they pull back for a healthy retracement. After retracement, the price tries to re-test the new high or new low. When this test of new high or new low fails, and it does not maintain the prices above the new high or low, it signals a potential trend reversal. This setup is very powerful and signals the beginning of a correction.

Trade: The market attempts to test a recent new high or low, but does not hold the prices above this range. Trades are entered to sell the low of the bar trying to breakout or buy the high of the bar trying to breakdown.

Target: The target is usually the “swing low” prior to the new high for 2B Buy setup or “swing high” prior to the new low for 2B Sell setup.

Stop: Protect your “long” trade entry by placing a “stop” below the recent low and protect the “short” trade entry by placing a “stop” above the recent high.

Trading 2B Bearish Pattern

Trading 2B Bearish Pattern

The example above shows Trader Vic’s 2B bearish reversal pattern from the Russell Emini (EN) 5 minute chart. ER2 made a new high at 788. Prices retraced a few bars but traded above the bar 1’s low. After pullback, ER2 rallied back to test the new-high at Bar 2. Within few bars, ER2 closed below the breakout Bar 2’s low. This signaled a short trade at 787.7.

  1. Enter a “short” trade below the low of the Bar 2 at 787.7.
  2. Place a “stop” order above the high of the breakout Bar 2 at 789.
  3. Place a target at the “swing low” prior to Bar (1) at 783.5.

Trading 2B Bullish Pattern

Trading 2B Bullish Pattern

The example above illustrates a 2B “bullish” reversal pattern from the ER2 5 minute chart. ER2 made a new low at 780.5 (at Bar 1). After a new low, ER2 reversed its trend and rallied back to 784 for a healthy pullback. ER2 attempted to test the new low again at 780.5 at Bar 2 to close below the low of Bar (1). As the market continued to consolidate around the breakdown levels, a long trade is anticipated. A reversal and close above Bar 2’s “high” triggered a 2B “reversal.” At Bar 3, ER2 reversed and closed above Bar 2’s “high” signaling a “long” trade.

I. Enter a “long” trade above the high of Bar 3.

  1. Place a “stop” order below the recent low at 778.5.
  2. Place a target at the “swing high” before Bar 1 at 786.5.

Trading 2B Patterns

Trading 2B Reversals

The example above shows a series of 2B “bullish” and 2B “bearish” reversals. The first example explains a 2B “sell” reversal setup for a “short” trade below the close of bar (3). The target is set at “swing low prior to bar (1). The “stop” order is set at bar (2)’s high. The second setup shows a 2B “bullish” reversal. A “long” trade is triggered above the high of bar (2). The target is placed at the “swing high prior to bar (1). A “stop” order was placed below “swing low” prior to bar (3). The third setup is a 2B “short setup” similar to 2B “short setup” at Short trade 1.

Trading 2B Patterns