Many people ask me, “how do you know that the market has reversed?” There are various answers to that question depending on market conditions and economic news. On an intraday basis, however, there is a tool we can use to help determine if the market has reversed. This is the 7/11 Rule. Though more like a guideline, the 7/11 rule looks at intraday market movements so see if the market has gained enough strength to reverse direction.
The 7/11 Rule is base off the Emini S&P(ES) and Emini Nasdaq (NQ) futures contract. It primarily works in an up market, though we can use it in a down market but the risk of the trade/direction increases. The principle works this way: if the markets make a low, whether in Globex or the day market, then one hour after the low has been in place, if the ES gets 7 points above its low, and the NQ gets 11 points above its low, then odds are the markets have reversed on an intraday basis.
Look at the picture below:
Notice 2 hours after the ES made a low it was 7 points above that low. The NQ got 11 points above its low inside of 1 hour. So in this case, the NQ triggered first and we had to wait on the ES to confirm. You will notice that the markets continued higher throughout the day.
You may notice that the NQ will move the 11 point much faster than the Es will move 7. This is due to the fact that the NQ currently moves about 2.5 points for every point in the ES. So by the time the ES moves 7 points the NQ will move about 17. But both need to be at their respective prices for the rule to kick in.
If we break the 24 hour market up into 4 hour time segment starting at 17:00 CT, we can reset the 7/11 rule 5 times a day using the highs and lows of the segments to set the 7/11 rule off of. Good luck trading.