Thursday, March 8, 2012
Preferring deep pullbacks
The most important skill to master trading with trend is selection of the appropriate pullback to enter on. Depending on where you are in the trend, you have a few options. For example, let us suppose you determined that the W move and FF to b12 ended the bear move and is setting up a reversal of the opening trend. If you did not buy b12, you could always enter on the very first pullback. b15 high was lower than b14 on the March contract and you could have bought above it. i.e, Shallow, 1 legged pullbacks are acceptable right after the trend begins.
Often you can also buy the first 2 legged pullback. For example, b28 was the first 2 legged pullback and in this particular case, there is always the risk that the breakout above b1 would fail and give a deeper pullback or reverse the move up but in many other cases, the first 2 legged pullback of a strong move often works even if its not deep. Normally, I will not trade a pullback that's not deep even if its the first 2 legged pullback. Exceptions are when its a soft-trend day, when the pullback is at ema and the signal bar is strong. b28 presented none of those conditions.
But what you definitely can buy is the first deep pullback. All shallow pullbacks (b15,18,28,30,35,39) can be considered part of the same larger leg and the first deep pullback should usually gives at least one more leg in the same direction.
A deep pullback is one where the pullback is at least 2 points from the extreme of the day and deeper than the size of at least one recent bar. Breakouts of deep pullbacks, (especially the first) are stronger and fill your targets quicker with a smaller risk of pullback to your entry price. This makes them excellent swing entries. If the breakout from a deep pullback goes much beyond the previous extreme, the chances of the trend terminating on a test of the prior extreme diminish and you can take the next deep pullback with higher confidence.