How to Spot & Trade Euphoric Top Reversals

Hi folks!

I'm back with another step by step educational post centered around a trade AoT made earlier last week but the technicalities around this topic can be applied to your strategies in many different types of markets and scenarios. That being said I think this is a great topic to cover with where we're currently at in our current market so lets get into it!

Strategic Positioning

Occasionally when the market falls into an extreme such as an extreme oversold NYMO/ NAMO reading which we have covered numerous times on this very blog or when a stock or index shows signs of an extreme in terms of consecutive days up or consecutive days down anticipating a pivot is usually the next step to the trade.

Its not uncommon for traders to use their max position sizing when entering and exiting trades and although this can be a lucrative endeavor in a strong trending market as soon as the market pivots against your positioning either due to bad timing, geopolitical news, or headlines your "strong" position can all the sudden playout as an outsized drawdown. This is especially true when markets or stocks become extreme.

This is where strategizing your positioning against an anticipated pivot can become a lucrative tactic. The basis of the idea is if you believe the market is at or near a pivot point due to an extreme you don't simply just pick a point where you believe the market could pivot from. You pick a range!

The range in which you pick is often twice as wide as what you would typically account for as your risk parameter for a typical trade. The reasoning for this is because you're not automatically just assuming you're right with the mindset of "The market must pivot at this point". You're saying "Hey, the market is at an extreme, extremes can become more extreme but if this extreme tops / bottoms out within this range it will fall within my risk parameters".

Once your range on the anticipated pivot is established you begin to scale into the positioning. Breaking down the entry in its entirety into 2 - 4 parts. Generally speaking I usually only take 2 part "1/2 size" entries but some traders may deploy a strategy of upwards of 4 parts or "1/4 size" entries on a trade like this.

Your first entry should be sized in terms of the worst case scenario. Basically asking yourself "If I'm wrong in this spot and my anticipated range gets taken out my maximum risk on the trade should be at or below that range in relation to the size of my first entry". So speaking in basic terms if your maximum account drawdown on a normal every day trade is 2% of your account and your normal position size is 20% per trade you have a 10% range on the trade to work with, with a typical trade before you're stopped out on a position.

Take that same positioning mindset and cut in half. Your enter the trade half sized (10% position size opposed to your typical 20% position size) and the all of the sudden in order for your maximum account drawdown to get taken out the 10% sized position would need to draw down 20% to reach the maximum 2% risk on the account.

Again this isn't about trying to be "right" this is simply in anticipation of a pivot where your goal is to give yourself enough room to breath in the begging and then if the trade starts to work in your favor you can add into it and tighten up your risk (stop) as the trade progresses.

Simply speaking you're creating a wide range of flexibility within your trade which in turn allows the trade to breath which is especially important in stocks that are more volatile like leveraged 2x - 3x ETFs or markets that are news and headline driven.

How does AoT use such a strategy to their advantage?

A recent trade AoT took was $SOXS after 17 consecutive days down. The idea behind the trade was to start with a half size position and add to the trade on any gap down but sell into any gap up. The first half was entered on April 23rd. Half sized.

This is how the trade developed:

The very next morning $SOXS gapped down allowing for the second part of the entry.

I shared detailed thoughts on SMH that morning and how I believed that gap would be the final short term herahh. Speaking in terms of a 3 - 5 day period.

Note that the initial stop was modified in order to fit within the parameter of the trade but more importantly it wasn't outside the maximum drawdown of a typical trade. It was set in place to create further cushioning.

The cost average between the two entries $15.29 & $13.90 gave us an average entry of $14.59.

The low held and a 12.9% gap up on April 28th allowed us to complete the second part of the trading plan by selling into strength or a large gap up.

A very important point to note, especially in terms of stocks or markets that reach extremes is these types of trades should be considered very short term in nature. Hit and run style thinking and execution. You're anticipating the trade but when presented with large gaps up or rally days this isn't usually a point of excitement this is the spot to follow through with the plan and net the PnL!

The Psychology of the Trade

Relatively speaking, over the past 28 year of my trading, traders continue to "act" the same near market tops, often overly excited about all of the money they've collected from the market with the mindset that the good times will never stop. Piling risk on at astonishing rates near short term "tops", greed more or less, simply put. This creates very little flexibility in the case that the trade begins to go against you.

Then, like clock work the market pivots and the "easy" trades evaporate. The psychology is remarkably the same around these pivots. The first pivot is often caused by buyer exhaustion and it tends to come without notice. VIX tends to be depressed with no sign of short term danger in the market. During this time the market may make a swift 3 - 5 day pullback and then the trend and a subsequent bounce recover. Often quickly.

Here is a very good example of how all of this plays out, time and time again!

Back to the topic of "flexibility", traders are creatures of habit and easy markets usually create the worst habits. Instead of breaking entries down into partial entries or "scaling in" and "trimming out" many traders pick exact points of entries and exits. Inherently this isn't a bad strategy for seemingly easy markets because even the worst trades tend to work themselves out with the umph of the market behind them. Your single biggest point of risk is often full size entries on positions especially in a market that pivoted. Traders know that they often won't enter an exact bottom or sell an exact top so getting in the mindset that the stock has neither bottomed on your first entry or topped or your first exit allows you to scale into the initial entry and trim the exit, creating an opportunity to get the most out of the trade without ever being oversized at any one point.

Traders can naturally create flexibility and minimize risk with positioning by simply breaking an entry point down into 2, 3 or 4 different price points. The first entry could be 1/4 or 1/2 of the size of your full position. This way your risk parameters can be set wider allowing the position to move with the market and scale into strategic price points as the stock or index flows. Markets and stocks are usually the most volatile near short term pivot points. Flexibility is key!

The discipline of scaling into and trimming out of positioning often sees its biggest rewards in volatile or news driven markets just like what traders have experienced so far in 2026.

Conclusion

I hope this step by step educational post created some new thinking points in terms of strategies that you deploy from day to day. Scaling into and out of trades can be very style dependent but with a little practice and the right type of markets you can turn good trades into great trades with these strategies!

Let have a strong week in the markets!

Cheers and happy trading!