When buying on pullback goes bad

[JTK]

Quote from mad_badger:

Scenario:
Intraday trading equities. A strong rally starts to lose steam, pulls back to MA and trendline for the first time.
Pull the trigger on the LONG side at or near MA/trendline.
Instead of bouncing off and continuing uptrend, it tanks.

Questions:
1) Before going LONG at pullback to support/MA/trendline, should one look for confirmation or other signals? What clues hint whether trend will break or likely to continue?

2) Once already in the LONG position, after failing to bounce at support, what exit strategies should be considered? Could this be a fakeout, and trend will continue? Just head for the exit, because the trade did not go as planned? Wait for (how long?) retracement to minimize losses?

1) I look at the price action - how forcefully did it approach the trendline/MA support? Long bars are more likely to punch through support.

2) I set stop loss a couple of ticks or so below support. If it hits stop loss, the trade premise no longer exists as support is broken. Stop loss is set simultaneously with the entry.

 

[Hook N. Sinker]

Some trades are losers. It can not be avoided. I don't know of any method that wins 100 % of the time. I just stop the loss and get out.

 

[4DTrader]

Your rigid approach is likely to result in catching a falling knife.

 

[mad_badger]

Quote from JTK:
1) I look at the price action - how forcefully did it approach the trendline/MA support? Long bars are more likely to punch through support.

JTK, can you expand on this point? What if price approaches MA, not extremely forcefully, and touches it then walks the MA like a tightrope for several bars? Do you still base your decision off of the approach to that MA, or the way in which price behaves once touching that MA? Perhaps some chart examples would be helpful here...

 

[JTK]

Quote from mad_badger:

JTK, can you expand on this point? What if price approaches MA, not extremely forcefully, and touches it then walks the MA like a tightrope for several bars? Do you still base your decision off of the approach to that MA, or the way in which price behaves once touching that MA? Perhaps some chart examples would be helpful here...

I've seen what you describe though I don't have any charts handy to upload.

If the price approaches the MA, I have a limit order already in to buy/sell at 1 tick above/below the MA. If previous pullbacks to MA dipped below (or went above) a little bit I may set my entry price right at the MA or just beyond. Always trying to get the best price, which helps prevent getting stopped out if MA is penetrated a bit.

If the price then "walks" along the MA - and the MA is still trending in my favor - then no problem, as by definition the average price is moving in my favor. Sure, the candles may bounce up and down off the MA, but the lows will always be higher (or lower if shorting).

If the MA starts to flatten out, or worse yet start to reverse, then I'm out as the trade premise is broken.

 

[jbob]

Mad badger,

I think this is a very interesting issue and gets to the heart of trading. The first question is where should you buy. Taking Long trades as an example, say you've identified an area of support in an uptrend. This could be a trendline, moving average, previous area of support or resistance, pivot point, ect.... Do you somewhat blindly buy right at this price (or a little bit higher to ensure a fill), or do you wait to see if it bounces first? There are pros and cons for both approach. Buying first, asking questions later can get you in at a good price. In fact sometimes the market will first bounce at areas of support and only come back to your entry if support is going to be ultimately broken. Therefore, you can enter right at support and quickly trail your stop up to breakeven. On the other hand, blindly entering at the area of support can lead to catching a falling knife as price rips through support.

As for confirmation, you will have to pay for it. If you wait to see it bounce, your risk will be much higher as price has already started to move. Oftentimes, the market will bounce at support and perhaps form a hammer, which some might see as nice confirmation. Others might see a stochastic crossover, others the MACD turning up, and others may see the highs of prior bars being taken out. All of these different levels of "confirmation" basically lead to higher prices if you want to enter the trade (for a Long setup). However, since prices bounce so frequently around levels of support, I'm not sure how much better is the probability these trades will actually work if you see a good bounce.

I think your answer probably lies somewhere between these two extremes. Try to avoid catching the falling knife, but don't pay up too much for confirmation by not requiring too much confirmation. After all, trades are profitable because you properly took and managed risk.

All of this only speaks of entries, but exits are just as important (many think they are more important). I recently raised this same question in another thread about whether you should exit a trade immediately if a trade goes against you. I think that if the premises of your trade entry are violated (support being broken) that you should exit the trade. The slightest break of support could be a shake out, but you have to be reasonable as to what you define as a shake out or stop gunning. This always raises the ongoing debate of tight-stops versus wide stops. I like medium stops that adjust for volatility. Just some thoughts. jbob

 

[cashmoney69]

My entire system pretty much revolves around pullbacks... (retracements), and imo they're not as easy as the books like to preach. A lot of people that play these also use fibs, like myself.

Here is a chart showing usd/jpy ..i bought at 102.5 (50% retracement) but got emotional and decided not to sell

usually if the stock or whatever doesnt bounce after a 61.8% retracement then get out.

 

[bighog]

I am also a huge fan of trading the retracements............after a retrace of the first leg and the retrace holds the 50% area ........get ready to see a continuation of the previous trend (mind you i trade 5 minute charts, ES only for now).

When you get a "HOOK" that is your signal that another leg seems to be in the works. Did you add-on for the second leg?

After a second leg (assume the second leg covered as much price movement as the first leg..................and you see another retrace and maybe even a small consolidation............and the retrace again did not travel past the 50% retrace of last leg...............you can assume the trend is still valid and start looking for a third leg. 3RD legs are smaller odds of a continuation but as long as you see no reversal signal.,........assume the 3rd leg is a coming.

Indeed there is no sure things in trading so always be fast on the mouse if you GET A REVERSAL indication to exit the initial direction trade. A reversal indication is NOT a signal to do a D.U. A. R. WTF is a duar you say, a duar is a double up and reverse. Only reverse when it is CLEAR that a reversal has taken place.

Professionals use STOPS on all trades..........so should you. The beauty of STOPS is you know worst case so your mission is to watch price action and GET OUT before your STOP is hit...........TRY IT you will like it. ..

PS...........with proper discipline the tidbits in this thread are worth a lot of money........remember the trading game is easy.......the hard part is you fighting yourself.