Why wait for a pullback?

[Blitzjoker]

According to the Dow theory (which you can observe in every financial instrument), markets move almost NEVER in one straight line up or down, instead every time in a trend-move followed by a (weaker) counter-move.

When you're entering the market is up to you, but as I'm using leveraged positions, I've got to place a very tight SL. Entering on the primary move would kick my position out as soon as the pullback sets in.

I agree that markets seldom move in a straight line one way for long, but the downside of waiting for any kind of reversal is that you can miss the best part of the move, and also find that the 'pullback' might actually be a reversal. So you can place a closer stop loss, but with more chance of hitting it.

 

[Blitzjoker]

5 year back test is largely meaningless, that sample is too small for the strategy you outlined.

That would surely depend on the timescale you are trading? 5 years sounds plenty for a day trader say.

 

[easymon1]

none of the backtesting research

Can you characterize the specifics of your backtesting research?

 

[Laissez Faire]

You said "You really need to know the market you're trading - where it's at and where it's going". That would be ideal wouldn't it?

What's stopping you?

 

[Blitzjoker]

What's stopping you?

Well ... the fact that it's quite hard to know where the market is going. That's what we are all trying to do isn't it? Have you cracked it, and would you like to share?

 

[easymon1]

none of the backtesting research I have done on various systems over the last five years or so suggests that waiting for a pullback is a good strategy.

Can you describe the specifics of some of your backtesting?

 

[Blitzjoker]

Can you describe the specifics of some of your backtesting?

Various strategies, mainly trend following day trading based on trend strength using simple Price Action or a Kalman Filter, using minute data (open, close, high, low) mainly on Dow, Dax and FTSE. Have you had different results?

 

[SimpleMeLike]

It seems the prevailing wisdom is that when a market starts to move in one direction, you should wait for a pullback before you hop on board the trend. I suppose the idea is that if you buy a rising market at a lower price, that is in some sense a ‘bargain’.

I have never really understood this. Why does waiting for a sign that the market may be starting to move against a trend make that trend more attractive? It seems to me you would be better just jumping on board while the market is still moving up.

Unsurprisingly to me, none of the backtesting research I have done on various systems over the last five years or so suggests that waiting for a pullback is a good strategy. And yet it is commonplace to see it recommended. Am I missing something?

Hello Blitzjoker,

I do not have time to wait for no pull back. Seems like a waste of time. Whatever I see, I do if I think I can make money.

If I see short, I go short. If I see long, I go long.

"It is all a guess, if you have no back test"

 

[Tradess0610]

It seems the prevailing wisdom is that when a market starts to move in one direction, you should wait for a pullback before you hop on board the trend. I suppose the idea is that if you buy a rising market at a lower price, that is in some sense a ‘bargain’.

I have never really understood this. Why does waiting for a sign that the market may be starting to move against a trend make that trend more attractive? It seems to me you would be better just jumping on board while the market is still moving up.

Unsurprisingly to me, none of the backtesting research I have done on various systems over the last five years or so suggests that waiting for a pullback is a good strategy. And yet it is commonplace to see it recommended. Am I missing something?

One of the reasons is because it allows you to have a smaller SL and therefore you can enter higher position at the same risk (1% for example).

 

[Mr.Richter]

but the downside of waiting for any kind of reversal is that you can miss the best part of the move

Agree. Entering in the trend direction (not in a pullback or at a support/resistance zone) might work and could give you more profit, BUT if the pullback sets in, it results in more losses.

One needs to calculate for himself, but for me standing on the sideline and watching the price running away costs me NOTHING. Getting stopped out in a pullback costs me my risk percentage.
It's more uncomfortable watching the market running away, but in the end, I'm making so much more money than by chasing the trend.