Pull back or reversal?

C

cashmoney69

Trading the right edge, how can you tell a pull back from a reversal?

Buying the pull back..or dip as they call it, can be profitable, but how can you tell if its a pull back or major selloff?

- nathan
 
I have this problem to and the only thing I can tell is that if i'm long, and the trend is up, as long as it doesn't go lower then the low of the last dip, i'm still staying long. Meaning as long as the stock keeps making higher lows, i'm still in. I have problems around whole numbers when the stock can print the whole figure and then pull back 25-30 cents in a shake out before continuing the trend.
 
In a well-defined uptrending market, pullbacks/dips occur off of the highs. When a dip "stops", you expect the market's uptrend to resume and make new highs. If new highs don't happen quickly enough AND the market looks like it's going to "test" the low of the dip, you'll then generally have a sell-off and confirmation of a trend reversal when that previous low is breached. I hope that helps
 
.... If instead you play flags (consolidation during an uptrend), you can buy at the support, and sell 66% at the resistance, and hold 33% for a breakout.
 
Quote from cashmoney69:

Trading the right edge, how can you tell a pull back from a reversal?

Buying the pull back..or dip as they call it, can be profitable, but how can you tell if its a pull back or major selloff?

- nathan
More...

To be technical...a bearish reversal pattern will occur before a price pullback.

Also, bearish reversal patterns that occurs after a pullback...I tend to call those bearish continuation patterns instead of reversal patterns.

Simply, when trading pullbacks...you shouldn't be concerned with trying to determine if its a pullback or a reversal pattern because the reversal signal will have already occurred.

Thus, your concern should shift to if the bearish reversal price action and market conditions are strong enought to push the pullback into a downtrend or will the Longs gain their second wind and push the market back upwards to higher highs in comparison to the recent high where the bearish reversal pattern had previously occurred.

Also, the difference I see between a price pullback and a downtrend is during a pullback it usually stays in the upper 1/3 of the uptrend range via either low volatility or low volume.

A downtrend...volatility will be increasing along with the depth of Wide Range Bodies (WRBs).

Downtrends tend to have more Dark WRBs in comparison to Pullbacks and/or Downtrends tend to have less White WRBs in comparison to Pullbacks.

Therefore, when trying to determine the stage of the market...

The first thing you need to identify is the volatility or volume in the uptrend and then compare the volatility or volume of the pullback against that uptrend that preceded the pullback.

With those two pieces of information...

You'll be able to determine if price is still in a pullback or if it is in a downtrend.

Some traders feel safer buying pullbacks that are declining in volatility whereas others are more aggressive and only buy pullbacks that start to have rising volatility levels...

I'm one of the latter types.

Last of all, change your chart interval and you may have a completely different perspective if the market is in a pullback or downtrend.

Mark
 
Edwards and Magee's book covers this issue completely. There are clear rules and objective methods for measuring these things in the tactics section. I find the methods work consistently.
 
Perhaps if a trader is able to identify whether a pullback or a reversal with reasonably high (not necessarily perfect) certainty/ probability, he would be richer than Bill Gate easily. :D
 
Quote from OddTrader:

Perhaps if a trader is able to identify whether a pullback or a reversal with reasonably high (not necessarily perfect) certainty/ probability, he would be richer than Bill Gate easily. :D
More...

Being able to identify (as it is occurring or hindsight) what stages the market is in (uptrend, pullback, downtrend, consolidation et cetera) is completely different from being able to trade any of them.

Example, I've been seen many post here at ET recently where someone has correctly identified the market direction...

Market moves +10 points (futures) and the trader saids he got 1-2 points along with being happy with his/her results.

Yet, I seen a few others start threads about how can they exploit the price action when they nail the direction correctly.

Simply, you can be poor while being consistently correct on the market direction.

The ball game changes as soon as real money changes hands.

Mark
 
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