Wednesday, February 1, 2012
Deep vs shallow pullbacks
The most successful trades are off with-trend signal bars with strong closes and no overlap in a deep pullback. In particular, they give good swing entries that tend to go to 4 points or more.
The first requirement is that there is a trend. A trend should be fairly easy to spot. If the chart in front of you is moving from bottom-left to top-right or top-left to bottom-right, you are likely to be in a trend. The conventional definition is higher highs and higher lows for a bull trend and lower lows and lower highs for a bear trend.
The second requirement is a strong signal bar. A weak signal bar in a shallow pullback and overlap will work in a soft trend such as the earlier part of today (b23,33,41). However, once the trend is no longer soft, every such signal bar is likely to fail (b57,61,65).
The third requirement is no overlap, because overlaps are trading ranges and their breakouts are likely to be faded. However, if the signal bars are strong and at support, you can take some second entries since they can act like breakout pullbacks. If you are unsure, avoid overlaps.
The last requirement is a deep pullback. A deep pullback ensures there is sufficient room to the previous extreme to allow a profitable exit. For most trades, that equates to about 10ticks for a 2 point profit. However, as long as the pullback is deeper than a recent bar (b69) its likely to succeed with-trend.
Soft trends and hard trends are special in that they dont give deep pullbacks or good signal bars but nearly every signal works. But on the other 80% of the days, these rules will greatly reduce the number of trades you can take and greatly improve your consistency.