Chapter 6 · Part Two
The AW Reversal
The primary setup. Price grabs external liquidity and reverses.
About 12 minutes
This is the primary setup. It captures the moment price grabs external liquidity and reverses. Executed properly, with every confirmation aligned, it produces an extremely high win rate.
It is also the parent of everything else in the model. The continuation in Chapter 7 only exists once a reversal has already happened. If you only ever learn one chapter of this, learn this one.
The shape of the whole trade
Every stage on one diagram. Work through the numbered markers in order, because the order is the setup.
Tap the numbers
1. The draw
Before the session, find the untaken liquidity on the higher timeframe: a previous day high, a weekly high, equal highs. Two groups have orders resting above it, shorts with their stops and breakout traders waiting to buy the break, and both of those are buys. That is why price is drawn there. Mark it and leave it. This is where price is heading first, and it is not where you take profit.
The step-by-step process
Identify a clear external draw
On the higher timeframe, where is the untaken ERL? Mark it. This is where price is heading first, and it has to be taken before there is a setup at all. It is not the target of your trade. Once it gets swept, your target becomes the ERL on the opposite side.
Identify the main trend
Is higher-timeframe order flow bullish or bearish? This determines which direction you will be trading the reversal.
Wait for price to seek ERL
Do not anticipate. Wait for price to actually reach and take the external liquidity. The sweep must happen before you apply the model.
Confirm the sweep
Price sweeps the external level and takes out the highs or lows. Stops get triggered, breakout orders get filled. This is the liquidity grab. You want a wick through the level, not a tap.
Mark the structure
The trend running into the level is what you are trading against, and its last significant opposing swing is the neckline. Mark it while price is still approaching, not afterwards.
Watch the reaction
You want a quick, impulsive move off the low or high. Not a slow grind. The displacement has to be aggressive, because that is what institutional intent looks like.
Confirm the neckline break
The displacement must break the structure, the neckline. This is the market structure shift and it is the most important step in the chapter. Without a confirmed neckline break you will get faked out.
Apply IRL to ERL for R:R
After the shift, identify fair value and the opposite ERL. Your entry is at IRL, your target is ERL. Measure this before you enter, because the measurement is what decides whether the trade is takeable at all.
Look for the IFVG, then wait for the retracement
The displacement leaves a gap behind it. What you want is one that price had respected from the other side before, so that breaking through it inverts its role. A plain fair value gap is still a valid entry, but an inverted one is the higher quality version and it is what to look for first. Either way, wait for price to retrace into it.
Take the entry
Enter on the retrace into the gap. Waiting for the 50% level rather than the first touch gets you a better price and a tighter stop when it fills, at the cost of the setups that turn before they reach it. That is a trade-off you make per setup, not a rule. The flip candle is the alternative if you want confirmation before committing.
Confirm the draw
Once you can see clear ERL sitting on the opposite side, you have the full AW Reversal. Execute with confidence.
The neckline, properly
This is the step people get wrong, and it is worth more space than the rest of the chapter combined, because everything downstream depends on identifying it correctly.
The neckline is the last <em>significant</em> opposing swing of the trend you are trading against. In a downtrend that is the last lower high. In an uptrend it is the last higher low. Significant is doing real work in that sentence: structure is fractal, and every small pivot inside the final leg is technically a swing. You want the one visible at the degree you are trading, not the smallest one you can find. That swing exists before the sweep, because the sweep is the final leg of the trend and this is the swing that leg started from.
Price will usually come back to that level after the sweep, stall there, and only then break it. In a clean reversal that retest sits at the same price as the original swing — which is where the name comes from, and why plenty of traders mark the later touch instead. When the setup is clean both landmarks give you the same line, so it does not matter which one you drew. When they differ, take the earlier swing. A high that forms after the sweep and sits below the last lower high does not end the downtrend when it breaks; it is a smaller-degree shift, which is an earlier and weaker signal, and knowing the difference is what stops you calling a reversal that has not happened yet.
The level is on the chart before the sweep. The sweep puts the setup in play; the close confirms it.
- 1Last higher low. This is the neckline
- 2Sweep of the old high
- 3Close through it. The shift
The neckline on a real chart
Before the whole model, the one level everything depends on. Follow the order of events left to right, because the order is the thing most people get wrong.
NQ1! · 3 minute
- 1The neckline, drawn from the lower high it comes from at around 17:45. Notice the line starts at that swing, not at the sweep — it was already identifiable while price was still falling. It is the last significant lower high of the downtrend, not the smallest pivot you can find inside the final leg.
- 2The sweep, at the important level below. External liquidity is taken. This does not create the neckline, it puts the setup in play; the level was already on the chart.
- 3The break. Price closes above the neckline and the downtrend is over — that close is the market structure shift. A wick through and back would not have counted.
- 4For a short every one of these inverts: the neckline is the last significant higher low of an uptrend, the sweep is above, and the break is a close below.
How to identify it in real time
Work in this order and it stops being ambiguous.
Mark the last opposing swing
The last lower high in a downtrend, the last higher low in an uptrend. One point, not a zone. It is already on the chart — you are identifying it, not waiting for it to form.
Wait for the sweep
The level only starts to matter once external liquidity has actually been taken. Before the sweep you have a line and no setup.
Watch for the retest
Price usually comes back to the neckline after the sweep and fails there. That failure is confirmation you marked the right level, and it is the last thing you get before the break.
Mark the line and leave it
Draw it once. If you find yourself moving it as price develops, you are fitting the level to what you want to happen.
Require a body close through
A wick through the neckline is not a break. The candle has to close beyond it. This single rule filters most fakeouts.
What it looks like when there is no trade
This is the same sweep, and it is the situation that costs people money. Everything looks right until the part that matters.
Price came back to the neckline twice and never closed through. No break, so there was no trade.
- 1Textbook sweep
- 2Comes back, holds above it
- 3Carries on up
Price swept the level cleanly, pulled back, and then simply never broke the low behind it. No shift, no trade. The setup you were waiting for did not happen, and the discipline is in accepting that rather than taking the sweep as sufficient.
If you only take one rule from this chapter into live markets, take this one: no confirmed neckline break, no position. It does not matter how good the sweep was.
The same setup, the other way up
Every diagram so far has been bearish, which makes it easy to memorise a picture instead of a principle. Here is the bullish version. Nothing changes except direction: the neckline is the last lower high of the downtrend, marked before price sweeps sell-side, and the shift is a close back above it.
Only the direction changes. The neckline is the last lower high, marked before the sweep.
- 1Last lower high. This is the neckline
- 2Sweep of sell-side
- 3Close through it. The shift
Where the stop goes
The stop goes beyond the swept ERL wick. Below the sweep low for longs, above the sweep high for shorts. It is always structural. There is no default point value and no maximum point value. Structure sets the width, and structure is different every day.
Size the position so that the structural stop equals your fixed dollar risk. A wider stop means fewer contracts, not a tighter stop.
The full sequence: the long side
The whole model on one chart. Work through it against the chapter and check each component off before moving on.
NQ1! · 3 minute
- 1The neckline, marked from the last significant lower high of the downtrend, before price goes anywhere near the level below.
- 2The important level, swept. Sell-side liquidity is taken and the setup is now live.
- 3The close above the neckline. This is the MSS, and until it prints there is no trade no matter how good the sweep looked.
- 4The FVG left behind by the move that broke the neckline. Entry is the retrace into that gap; the 50% level is the tighter version when you want the extra R:R. The stop sits below the swept low, and the target is the opposite liquidity above.
The same model, short side
Every component mirrors. Walk it deliberately rather than assuming you can flip the long in your head — trades taken backwards are usually taken by someone who only practised one direction.
NQ1! · 3 minute
- 1The neckline is now the last significant higher low, because the trend being broken is an uptrend. This is the component people invert wrongly: on a short you are watching a low, not a high.
- 2The important level above, swept. Buy-side liquidity is taken this time.
- 3The close below the neckline. The uptrend only ends once its last higher low gives way, which is exactly what makes this the level that matters.
- 4The gap sits above the break, so price retraces up into it. Entry is the retrace into it, the stop goes above the swept high, and the draw is the liquidity below.
Check yourself
Price sweeps the previous day high, then immediately displaces downward through a recent swing low. What made this a valid AW Reversal rather than a fakeout?
The AW Reversal checklist
- Untaken ERL identified on the higher timeframe and marked
- Higher-timeframe order flow agrees with the direction of the trade
- Price has actually swept the level, with a wick through rather than a tap
- Structure has formed and the neckline is identified
- Displacement through the neckline is aggressive, not a slow grind
- IRL to ERL measured before entry, and the R:R justifies the trade
- Entry taken on the retrace into the gap, or on the flip candle
- Stop placed beyond the swept wick, with size set from fixed dollar risk
Key points
A full reversal takes price from ERL to ERL, and your entry is always at fair value in between.
Always wait for structure and a neckline before entering. The neckline break is the number one reason traders avoid fakeouts.
Displacement through the neckline after ERL is taken is the green light.
Higher-timeframe FVG alignment provides extra confirmation and speed into the model.
High-quality reversals come after seeking ERL. The sweep is the fuel.
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