So it's discretionary. No hard and fast rules.
Why wait for a pullback?
- Thread starter Blitzjoker
- Start date
Both yes and no.
I wouldn't say my trading is based on price action per se. I trade more based on levels and statistical data. By levels I don't mean drawing lines on my charts as a rule, but other type of levels. For example, this morning I posted that 65 could prove a hurdle to the upside on ES and that's pretty much where we topped out. That was a level my software plotted automatically based on simple math.
So, I try to pick my spots for entries to the best of my ability.
If the market already made a huge move up - I will certainly not go all in long with my full size because I know that statistically we're close to a pullback and I will easily end up buying the high.
A couple of weeks ago I bought CCP.AX at $21 and was stopped out at $21.50 on that nasty little spike when CCP had made a profit announcement.
Anyhow CCP ran up again and I wasn't going to chase it.
I had a reasonable idea the general mkt was going to take a little rest so I placed a limit order in at $21.80 and I've been filled obviously.
Now give it a week or so, I should be back in the money.
There's a good chance CCP may drop lower again today, but thems the breaks.
If you have luxury of time and money, by being patient you can buy pullbacks.
Right atm, I have about 7 standing limit orders on various small cap stocks in the system hoping to catch pullbacks this week.
Anyhow CCP ran up again and I wasn't going to chase it.
I had a reasonable idea the general mkt was going to take a little rest so I placed a limit order in at $21.80 and I've been filled obviously.
Now give it a week or so, I should be back in the money.
There's a good chance CCP may drop lower again today, but thems the breaks.
If you have luxury of time and money, by being patient you can buy pullbacks.
Right atm, I have about 7 standing limit orders on various small cap stocks in the system hoping to catch pullbacks this week.
This post seems to be the crux of the matter. It is indeed a simple question, but the answer is anything but simple.
I understand what you go on to say in later posts that knowing your market, you can predict with some confidence when a pullback is likely to happen. I think I can do that too, but experience has shown me that I am very often wrong. However, you may be much more skilled at it than me.
However the bare bones of what you are saying above seem odd to me. You seem to be saying (and correct me if I am wrong) that in some sense you increase your expected profit if the market goes up and you buy with a buy stop order, and also you increase your expected profit if the market goes down and you buy with a buy limit order. It seems unlikely to me that both of those things can be true, but I'm here to learn stuff, so I'll look into it further.
It seems more likely to me, and I'll just put this out there, that it is psychologically easier to buy on a pullback because (in theory) you can use a smaller stop, and so have less 'risk' (though I don't really like that way of using the word risk, though it is common in trading). That is a perfectly reasonable thing to do, as trading is psychologically hard, and anything that makes it easier may be a good thing for an individual trader.
However, I am not sure that the maths of it make sense. The backtesting I have done seems to indicate that there is a very marginal increase in the probability of the market going up in the near future when prices are rising, and a very marginal decrease in the probability of the market going down in the near future when prices are falling. That would also intuitively make more sense to me. No matter what the 'context' of the market is (ie where the market has been in the relatively recent past) I can't see how a fall in price would then make a subsequent rise more likely.
Of course in a strong trend, it may well be that the likelihood of the market rising in the near future is so high that you can buy at any point and make a profit. But that is not the same as saying that a fall in price (a pullback) somehow increases the likelihood of the market going up; I would argue the reverse.
No.
I only suggested that as a strategy if I had conviction in the market moving higher eventually, but I was uncertain if we'd pull back or not and I wanted to make sure I got filled either way. Generally, I can and will use buy stop orders above market when price is moving lower in order to get filled as the market breaks the lower high pattern which happens on a pullback.
If I want to go long it's because I expect to sell it say 10 points higher.
If I buy at market my expected profit then is 10 points.
If price instead pulls back and I'm filled 5 points lower, my expected profit now is 15 points.
A pullback doesn't change my expectation of the market moving higher eventually. That's the difference between a major reversal and a pullback. Of course, not always easy to tell the difference.
I'd love to hear more about that back-test. Frankly, there's some many variables that I'm sure it's like comparing apples and oranges at best.
I'm not sure anybody said that?
Just look at a 5-minute chart of ES today. Most strong 5-minute bars had a reversal bar next. So, buying strength or selling weakness would be poor entries giving quick stop-outs for a loss.
Most days on ES have 2 or 3 major legs up or down. If you get in on the action by the time one leg is evident you'll usually have the market reverse on you.
Trend days on ES are rare. So, just buying blindly is very risky.
Of course not everyone here day trades ES. I think deaddog is trading only stocks, long only and for weeks at a time. Completely different ball game. Which is why I said that the answer to this question is very different depending on a lot of stuff and who you ask.
Thanks for clarifying. So you are saying that you want to enter anyway as you think the market is going up, then why not just enter at the market? I guess using orders to do it might get you a marginally better price, but with many liquid instruments it wouldn't make much difference would it?
The bit about the expected profit is a bit misleading. I would say that the chances of reaching your 15 points from a pullback is lower than the chances of reaching the 10 points without the pullback; we'd probably agree on that. You don't magically increase the expectation of the trade because the market has fallen.
There's nothing very complicated about it. Just running a trend following strategy looking at entering after a pullback versus entering without a pullback, I couldn't get the same expected profits. Sure, you can't compare exact like for like as clearly the trades are very different, but the principle seems sound enough. Once you think a trend is established (by whatever means), it seems to me you might as well enter a trade as wait.
Al Brooks talks at length in his books and videos about "buy the close" markets, i.e. where it is ok to buy the close of a bar if the market is moving up fast. I just think that waiting for pullbacks adds a level of complication to trading that, to me anyway, does not seem worth it.
Mind you, today was a bad day for trend following on many markets, particularly the Dow, where most pullbacks turned into minor reversals and made trading trends difficult. Today was a good day to wait for pullbacks. The day before was ok though...
Well, if it works for you and you're making good money with this approach that's all that matters.
No need to complicate things if simple answers and solutions are superior and workable.
Thanks for all your comments; I find it an interesting topic. I wouldn't say I was making good money though; I'm making a little bit, and always trying to improve.
The one other thing I would say about testing systems against data is that the market is very good at equalising things up. For example if you have a wider stop, it is hit less often, but you end up losing a similar amount of money overall. That shouldn't be surprising I suppose, but it is uncanny how hard it is to find a persistent edge.
Maybe some complexity is called for anyway after all, then?
To be honest, I'm not sure how much you'll learn from that kind of testing. I'm sure the input is limited and you're limiting yourself to basic classical indicators, I assume. Back-checking/testing charts manually I'm sure would be a better learning experience.
After all, you seem to already have recognized that there are various day types on ES. And if that is true - I'm sure it's also true that not all days should be traded equally.
ES dropped 67 points from high to low by today's close. Maybe some late shorts will try to short this, but now's the time to consider the long side. And since the long trend may just be starting here it's okay to not wait for a pullback.
Now, if ES runs up to say 4150 before you recognize the long trend and start considering a long entry, well, then you should be more careful as it might just be ripe for a pullback.
Not a trading recommendation. Just an illustration of what I'm talking about.
Well, complexity is fine if it improves results. Surprisingly often, it doesn't, and if you are running an automated system, complication can lead to curve fitting and optimistic results. I think Nicholas Taleb's 'Fooled by Randomness' notion applies a lot to trading.
No, I've given up on indicators. I find direct price action more pertinent. I'm pretty familiar with all the price action/TA stuff, but I find I lack the patience at the moment to apply it well as a discretionary trader. Some sort of hybrid system might work better.
I absolutely agree; spotting the difference between a trending day and a trading range day is pretty key to everything I think. Easier said than done in the heat of the action of course; dead easy with hindsight.