Level: Experienced
Reading time: 4 min
It is profitable to take advantage of trending movement patterns in a trade or asset class. However, most traders who explore trending stocks fear ending up in a reversal. Any time a stock’s or other kinds of asset’s trend changes direction, a reversal has occurred.
A trader should consider closing their position when circumstances no longer appear favorable once they can identify the possibility of a reversal. Reversal indicators can equally be used to open new trades because they may indicate the beginning of a new trend.
Mark Fisher discusses methods for spotting possible market tops and lows in his work, The Logical Trader. Fisher’s methods warn investors of potential changes in the current trend’s direction.
Fisher mentions a method known as the “sushi roll” in the book, and while it has no connection with meals, it was created while several traders were having lunch and talking about market setups. This article discusses this technique and how it can help identify market reversals.
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What is the sushi roll reversal technique?
The sushi roll reversal pattern, according to Fisher, is characterised by a timeframe of 10 bars, the initial five, which are inside bars, are limited to a specific range of lows and highs, and the second five, which are outside bars, engulfs the first five with both a lower low and a higher high.
The pattern resembles a bullish or bearish engulfing pattern, but instead of just two bars, it consists of several bars.
The sushi roll pattern shows a potential trend reversal in a downtrend, providing a possibility to buy or cover a short position. The trader may decide to exit a long position or probably open a short position if the sushi roll pattern appears during an uptrend.
Fisher mentions another trend reversal pattern termed the outside reversal week. The difference between this and Sushi Roll is that the former uses data from Monday to Friday of a week.
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Sushi roll testing
The NASDAQ Composite Index was used as a test case to determine whether the sushi roll pattern could have been used to spot pivotal moments during a period of 14 years, from 1994 to 2004. The outside reversal week’s period was doubled to two 10-daily bar patterns, and while the patterns were less frequent, they proved to be more reliable.
The chart was built by using two consecutive trading weeks so that the pattern began on a Monday and took, on average, four weeks to form. The rolling inside/outside reversal was the name given to this pattern (RIOR).
The test was designed to compare the performance of an investor using a buy-and-hold approach to that of an investor using the rolling inside/outside reversal (RIOR) to open and close long positions. The returns from the sushi roll reversal technique were 29.31%, while the returns from buy-and-hold were 10.66%.
Does the sushi roll technique work?
The trend reversal technique performed admirably in the testing, at least throughout the test period, which included both a sizable downtrend and an uptrend. This was regardless of the kind of bars used (weekly or a 10-minute).
Although a trader could run into trouble by using any indicator on its own, the value of confirmation is one of the cornerstones of technical analysis. When a secondary indicator is used to confirm a pattern, a trading strategy is much more reliable.
Considering the risk involved in attempting to predict a market’s top or bottom, the trader, at the very least, must use a trendline break to verify a pattern and always applies a stop loss in the event they are mistaken.
Conclusion
It will always be risky to time trades so that you join at market bottoms and leave at tops. When combined with a confirmation indicator, techniques like the sushi roll, rolling inside/outside reversal, or the outside reversal week can be very effective trading methods that assist the trader in enhancing and securing their hard-earned cash.
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