Distinguishing between retracements & reversals

[Hawker]

Quote from arzoo:

Hi guys,

i was wondering what chart tools (bars, candles, patterns, trendlines, etc) and/or indicators (or even strategies) provide reliable signals in distinguishing between:

1. when the nq/es is in a trend - retracements vs reversals

and

2. when the es/nq is in a base (possibly beginning a trend) - a pullback from breakout vs a failure of the breakout/base pattern.

thanks.

IMO the first thing we should consider is the time frame we're looking at because a retracement in a 60 min chart will look like a reversal in the 5 min chart or a retracement in a day chart will appear as a reversal in a 30 min chart and so on going from a higher time frame to a lower one.

I believe that the key is to look at your higher time frame and find out how the price action in that time frame affects your trading time frame ( a lower one).

It is rare that a trend will turn in the opposite direction ( reversal ) suddenly without showing early signs of weakness.

 

[Thunderdog]

I think that retracements and reversals can only be distinguished after the fact. Going forward, however, I think they should both be treated the same way. Therefore, trying to distinguish between them a priori is effectively a moot point from a practical standpoint.

 

[dbphoenix]

Quote from Thunderdog:

I think that retracements and reversals can only be distinguished after the fact. Going forward, however, I think they should both be treated the same way. Therefore, trying to distinguish between them a priori is effectively a moot point from a practical standpoint.

That would be difficult to do since an entry at the reverse would be stopped out and reversed by taking the retracement.

 

[sulong]

Quote from Thunderdog:

I think that retracements and reversals can only be distinguished after the fact. Going forward, however, I think they should both be treated the same way. Therefore, trying to distinguish between them a priori is effectively a moot point from a practical standpoint. [/QUOTE

Depending on what the bars look like leading up to a hi/lo point, the possible ret will behave differently.
For instance, if you have long range bars where the price retraces most of the prior bars range, a ret can and often retraces 75% or so of the prior move.
If on the other hand, you have bars that are normal range, and each bar retraces 50% or less of the prior bars, then the ret. will normally go with in a tick or so of the last H/L.

sulong

 

[jem]

I think thunderdog's point is that you look for your direction. You get the movement counter trend, you put on you trade, you put in your stops and you see what happens.

I not sure I endorse that point of view, but it is what I have been thinking.

 

[Thunderdog]

Quote from dbphoenix:



That would be difficult to do since an entry at the reverse would be stopped out and reversed by taking the retracement.

I believe that would depend on how you treat the price action. In my humble view, buying straight into a dip or selling straight into a rally is tantamount to playing chicken with the gods.

For all the methods and approaches that have been suggested thus far, I would wager that, for each instance that a method successfully distinguishes between a retracement and a reversal, I could find an example where it does not. What, then, does that say about the usefulness of the "distinguishing" method? This is why I am saying it cannot really be done. The fact that it is occasionally done is no more compelling to me than the outcome of a coin flip.

 

[dbphoenix]

Quote from Thunderdog:


For all the methods and approaches that have been suggested thus far, I would wager that, for each instance that a method successfully distinguishes between a retracement and a reversal, I could find an example where it does not.

Perhaps you could provide some of these examples so that we could discuss specifics.

 

[Thunderdog]

Quote from dbphoenix:



Perhaps you could provide some of these examples so that we could discuss specifics.

Would you not have to go first so that I can show you a counter example? Besides, are you telling me that for every instance of an indicator crossover or divergence or whatever that does work, that you, yourself could not find an example where it does not work? Come on, eh?

 

[Thunderdog]

Quote from sulong:

Quote from Thunderdog:

I think that retracements and reversals can only be distinguished after the fact. Going forward, however, I think they should both be treated the same way. Therefore, trying to distinguish between them a priori is effectively a moot point from a practical standpoint. [/QUOTE

Depending on what the bars look like leading up to a hi/lo point, the possible ret will behave differently.
For instance, if you have long range bars where the price retraces most of the prior bars range, a ret can and often retraces 75% or so of the prior move.
If on the other hand, you have bars that are normal range, and each bar retraces 50% or less of the prior bars, then the ret. will normally go with in a tick or so of the last H/L.

sulong

I agree that I would treat price action differently depending on its character, but I would not assume it to be either a temporary retracement or a reversal based solely on that. Again, this is just my personal view. I guess I just don't look that far in advance and make too many assumptions.

 

[dbphoenix]

Quote from Thunderdog:

Would you not have to go first so that I can show you a counter example? Besides, are you telling me that for every instance of an indicator crossover or divergence or whatever that does work, that you, yourself could not find an example where it does not work? Come on, eh?

Why would I have to "go first"? I didn't make the challenge. In any case, reducing it all to whether or not some particular aspect of trade management "works" or not is oversimplification. There are no guarantees, only probabilities. Therefore, one must also develop a set of entry, management, exit, and stop rules in order to protect himself if he assesses the probabilities incorrectly.

The guidance I provided earlier is just that - guidance. Getting down to creating a detailed retracement/reversal strategy is something else. If arzoo wants to do that, I'll be happy to help.