Buying/selling pullbacks intraday

J

jbob

Here's a question for all of you that buy or sell pullbacks/retracements for intraday trades. Specifically, do you wait for a pullbacks to a certain level (ie 20sma, 50%Fib retracement, trendline, ect....) and buy at that level as a limit order? Or alternatively, do you wait for a pullback into a "retracement zone" and then look for a breaking of the countertrend pullback and resumption of primary trend (ie, breaking the high of the bar that tested the 20sma, 50% Fib retracement, breaking upper downsloping trendline of a bull flag, ect....)?

I guess each has its own advantages and disadvantages. I suppose it really comes down to how much "confirmation" one needs to trade. Thanks for any input
 
Here's my 2 cents:

1) I think simply trading a retracement based on a specific measurement (Fibs, Sup/Res, SMA/EMA, etc.) is not good enough because it you can't apply one rule to all situations. From my experience, depending on how strongly/weakly the market is trending, it will retrace more or less. You need to take that into account to some extent. When the trend is very strong, the price may barely retrace, forming an almost horizontal flag at the top/bottom (where a fixed measurement would miss the move). When the trend is very weak, the price may retrace 100% (where a fixed measurement will probably get stopped out if you use a conservative R/R ratio).

I like to use a 20EMA as a reference level and then also look at the slope of the moving average. Based on how steep it is, you can adjust the retracement estimate.

Fib levels are also useful, along with recent support and resistance levels. But again, you can't use them blindly. They're only reference points.

2) This brings me to the dilemma that you brought up: should one wait for confirmation before entering? It is a good question because without confirmation, you will probably get stopped out often. On the other hand, waiting for a confirmation often raises the R/R ratio to an unacceptable level. In my opinion, you have to try to find a compromise as best you can. Here are some suggestions:

- Maybe wait for the market to simply stall instead of resuming the trend.
- Watch the TICK (if applicable) and see if it will give you a tip.
- Watch Level 2 and see if you can spot the rotation.
- Watch multiple related instruments (if applicable) and see if one confirms another.

Again, there is no secret to this and in some cases, you will miss trades or get stopped out but there is value in trying to find confirmation.

I would love to hear others' opinions on this interesting topic. :)
 
Nice post Afedoro. I agree that it simply does not make sense to enter a limite order, especially if the market is really selling off and indicators are confirming that more of a decline is a high probability event. I prefer to wait for a very bullish daily bar ideally supported by bottoming momentum indicators. The next day I drill down to 60, 15, 5 minute charts. I want to see the same thing happen now on the intraday charts that happened on the daily charts (correction then bullish bar accompanied by bottoming indicators).

Regards
 
Quote from jbob:

...Specifically, do you wait for a pullbacks to a certain level (ie 20sma, 50%Fib retracement, trendline, ect....) and buy at that level as a limit order?

...I suppose it really comes down to how much "confirmation" one needs to trade. Thanks for any input
More...

First...I look for WRB (wide range bodies) or some like to call them expansion bars.

If they show up (most of the time they do) in the price surge (up or down)...

I then look for reliable candlestick sub-group patterns (not the generic stuff you find in books) to develop within the range of that WRB.

I enter the trade via a market order.

In the attached chart is an example of today's price action in CBOT - YM via the 15min chart interval.

I annotated to show the Dark WRB in the price surge downwards...

You can see the range of that Dark WRB as a light purple shade.

The Japanese Candlestick pattern is highlighted in the green shade.

It's bearish reversal signal occurred within the range of that Dark WRB.

<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=872045>

What's so important about WRBs ???

They represent key candlestick s/r levels and a wealth of info about changes in supply/demand.

NihabaAshi
 

Attachments

Nice chart NihabaAshi. Thanks!

Another thing I do and that I would recommend, although it takes time and is a kind of a pain is to select some moves during the day that you believe were good plays and go look at the price action during the move on a tick by tick basis.

For CME-traded eminis, you can download the last 5 days of trades for free from the CME's website.

You have to massage the data a bit to convert it into CSV but it's not that bad and then you can look at it in Excel and use simple Excel formulas to analyze the action.

I think this has value if you trade very short-term and want to jump into momentum. It will give you a more precise idea of how your specific market moves.

You need to do it for each market because each one moves differently.

In certain cases, you will be surprised at how little some instruments pull back during a very strong move. When you see that much strength, you can jump in and still have a decent R/R ratio...

Good luck everyone!
 
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