Is It a Reversal or a Pullback?

[wrbtrader]

I wrote in past already that a system should have subsystems. I first define the strenght of the trend. Depending on the strenght I have 8 subsystems. Each of these subsystems is optimized for that specific strenght of trend. It is logical, and after testing it was confirmed, that this gave a huge improvement in results, but also had less bad signals. If you can improve net results from 2 to 3 points in ES, you improve your result by more than50%. Combined with compounding the improvement will even be massively higher.

If you drive a car you first check the weather.

1. If it is very hot, you put summer tires
2. I fit is raining very hard, you put rain tires
3. I fit is snowing you put snow tires

For each condition you have statistically the best tires to drive.

Apply the same logic in trading.

This is sometimes called "dynamic trading"...being prepare to trade different types of trends and/or different types of ranges via different methods or sub-methods.

In fact, I often say things here like when it comes to the markets...one size doesn't fit all. Simply, it doesn't make any sense to apply one trading system to all pullbacks and it doesn't make any sense to apply one trading system to all reversals and it doesn't make sense to apply one trading system to all trends and so on.

That's why people like that Forex guy I mention made the effort to identify +50 different types of pullbacks because he wants to categorize them and then apply a a trade method for a particular type of pullback and use a different type of trade method for a different type of pullback.

Yeah, it sounds like a lot of work but its worth it. In fact, most traders don't realize that they have started this approach to "dynamic trading" but they then suddenly stop. For example this thread itself...there's an attempt to identify pullbacks and reversals...two different types of price action.

Why?

Someone that wants to trade pullbacks via a specific trade strategy doesn't want to apply that same strategy to reversals intentionally or accidentally. Therefore, a trade strategy for pullbacks and a different trade strategy for reversals...two different trade strategies. Yet, don't stop there...keep going and then have different types of strategies for different types of pullbacks.

One size doesn't fit all.

 

[kut2k2]

This is sometimes called "dynamic trading"...being prepare to trade different types of trends and/or different types of ranges via different methods or sub-methods.

In fact, I often say things here like when it comes to the markets...one size doesn't fit all. Simply, it doesn't make any sense to apply one trading system to all pullbacks and it doesn't make any sense to apply one trading system to all reversals and it doesn't make sense to apply one trading system to all trends and so on.

That's why people like that Forex guy I mention made the effort to identify +50 different types of pullbacks because he wants to categorize them and then apply a a trade method for a particular type of pullback and use a different type of trade method for a different type of pullback.

Yeah, it sounds like a lot of work but its worth it. In fact, most traders don't realize that they have started this approach to "dynamic trading" but they then suddenly stop. For example this thread itself...there's an attempt to identify pullbacks and reversals...two different types of price action.

Why?

Someone that wants to trade pullbacks via a specific trade strategy doesn't want to apply that same strategy to reversals intentionally or accidentally. Therefore, a trade strategy for pullbacks and a different trade strategy for reversals...two different trade strategies. Yet, don't stop there...keep going and then have different types of strategies for different types of pullbacks.

One size doesn't fit all.

Are there really 50+ different types of pullbacks or just some neurotic obsessed with minutiae? Seriously, which is more likely?

Reminds me of David Aronson and his "6400 different trading rules" which turned out to be four different rules spread over 6400 different parameter sets.

 

[wrbtrader]

The issue isn't the number. Instead, the issue is that the price action is different and if you apply the same trade method to all reversals or the same trade method to all pullbacks without the understanding that all pullbacks are not the same and that all reversals are not the same...

You'll struggle in your trading and struggle in your price action identification.

Just as important, you don't even need to know all the different types. You just need to know the ones that you trade well within and that implies you need to recognize that particular type of pullback when it appears.

For example, someone in this thread has implied that he prefers pullbacks in a channel. Therefore, it would be ok for me to think he would either ignore other types of pullbacks that are not in a channel or he would lower his position size to better manage the risk of trading those other types of pullback that are not in a channel.

Once again, if someone is into the identification of different types of price actions...why stop at saying pullbacks are different than reversals when you can continue via sub-group each.

 

[schizo]

The issue isn't the number. Instead, the issue is that the price action is different and if you apply the same trade method to all reversals or the same trade method to all pullbacks without the understanding that all pullbacks are not the same and that all reversals are not the same...

You'll struggle in your trading and struggle in your price action identification.

Just as important, you don't even need to know all the different types. You just need to know the ones that you trade well within and that implies you need to recognize that particular type of pullback when it appears.

For example, someone in this thread has implied that he prefers pullbacks in a channel. Therefore, its would be ok for me to think he would either ignore other types of pullbacks that are not in a channel or he would lower his position size to better manage the risk of trading those other types of pullback that are not in a channel.

Once again, if someone is into the identification of different types of price actions...why stop at saying pullbacks are different than reversals when you can continue via sub-group each.

Exactly, not all pullbacks are created equal. As for me, however, what type of pullback ain't so important as how big the "magnitude" of the pullback. This harks back to the question "is it a pullback or is it a reversal"? Hence, if you deem it to be just a pullback, it's safe to enter in the direction of the trend. If you believe it's more of a reversal than a pullback, you should pull out altogether.

 

[kut2k2]

Exactly, not all pullbacks are created equal. As for me, however, what type of pullback ain't so important as how big the "magnitude" of the pullback. This harks back to the question "is it a pullback or is it a reversal"? Hence, if you deem it to be just a pullback, it's safe to enter in the direction of the trend. If you believe it's more of a reversal than a pullback, you should pull out altogether.

But that's the whole rub, innit? The only way to know for absolute certain whether a move is a pullback or a reversal is with hindsight. In the case of a pullback, if you hesitate to buy because you fear it might be a reversal, you've lost your opportunity to buy the dip. In the case of a reversal, if you hesitate to sell because you fear it might be a pullback, you've lost additional profits. How to tell the difference in the moment rather than after the fact? That's the whole point of this thread, innit? Whether you go with wrb's 50+ classification (he says the number doesn't matter but he did mention the number in three separate posts) or something more reasonable, the challenge for PA traders is some sort of "switching detector" for at least estimating probability of a given move being either a pullback or a reversal. Perhaps similar to the switching mechanism some traders use that indicates when to change from trend trading to counter-trend trading or vice versa.

 

[eurusdzn]

What do you guys think of a rate of change parameter to indicate a pullback or reversal?
It think it is rare and applies much more to a selloff but a shallow bear flag, with a small slope and rate of change provides a higher probability of continuation. Thats a pullback.
On the other hand, a high roc, steep 1 to 3 bar V seems to have a higher probability of reversal. Maybe both conditions can be tested and it is pure bias stated here.
My own beleifs is that catalysts and cross asset behaviour terminates swing highs/lows and
That levels are less of a factor but still important.

Ps: i would have rated the recent two day reversal in ES as a reversal based on the above statements but this looks to have failed today or at minimun deviated from ideal.

 

[wrbtrader]

But that's the whole rub, innit? The only way to know for absolute certain whether a move is a pullback or a reversal is with hindsight...

Not true because you're mixing together two different purposes.

The purpose of the identification is to determine if its a pullback or a reversal and you can do such without hindsight. Thus, you can do such in real-time as it is occurring.

In contrast, the second issue is at the moment you determine what it is...there's no such thing as "absolute certain" that it will continue as such after your entry.

Thus, be careful how you mix up the purpose because its best to keep them separated and there's no such thing as "absolute certain". Further, that's why I keep saying (multiple times in this thread)...do not become a one dimensional trader because they are the ones that if they determine its a pullback and then the market does something different after entry...they usually freeze like a deer on a dark rode when it sees headlights...results usually not pretty.

Therefore, it only make sense to be prepared if that pullback on entry decides to do something else after entry and you'll then no longer need to look for "absolute certain" results as if you're trying to outsmart the markets.

Best to just concentrate on trying to be profitable (prepare for different outcomes) instead of smart (absolute certain).

Prepare for different outcomes = Dynamic Trader

 

[Amalgam]

25 pages and not a single useful thing has been said.

 

[wrbtrader]

25 pages and not a single useful thing has been said.

Count the number of likes in this thread and you'll learn that what's useful to someone is not useful to you. Just the same, stuff useful to you may not be useful to someone else.

Personally, if a thread isn't useful...I tend to leave it alone and go read something else that I think may be useful.

 

[Autodidact]

25 pages and not a single useful thing has been said.

Couple of useful things, one even very powerful but unless you in the know, they fly by unnoticed, noob.