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.


  1. Hi Cad,
    I'd say maybe the most important concept you have taught me is to know when to expect a large two-legged move so that I have the courage to go for a swing trade instead of a scalp. I expected this today as I noticed the wedge going back to MA. However I was not sure what to regard as the finalization of the first leg. I was thinking that maybe even bar 15 could mark the end of the first leg. At the end of the day I thought bar 22 was the end of the first leg... Now if I understand correctly it is actually bar 41 that is the end of the first leg.

    My question is really is there any good way to anticipate the end of wave1 where I presume one should expect a deeper pb? Before that it would then be ok to Buy failed L1s and L2s...


    1. No. there is absolutely no way to know which pullback would be deep. On some days there may never be a single deep pb (soft trends). And therefore, you should avoid buying shallow pullbacks.

      Even the first shallow pullback can only be bought in certain rare circumstances (W1P: right after a W reversal, 1PB: after the first trend BO of the day). Learn to develop the patience to wait for deep pullbacks. Feel comfortable not trading on any day that you dont see a deep pullback. The first deep pullback is (my guess) 80%+ probability trade. With the exception of hard and soft trends, shallow pullbacks are low-probabilty trades (<50%) for a 2pt target.