sadago 

Hello friends, In a given trend, when the first sign of reversal is seen(exhaustion/ signal bar), how do you determine or form a view that - it is a reversal vs just a pull back. cheers!!

Olume. If volume is low, its a reversal ( weak pull back)

I am a trend trader. I look for trend in a daily or H4 time frame and buy entry at H4 or H1 chart. I keep it simple as long price is above 50SMA or 200SMA I will look for potential trade when price make a 123 formation. I prefer breakout trade than pull back trade. My indicator also serve as a confirmation trigger. MACD is trend bias, ADX show momentum and stochastic indicate oversold and overbought region. When price move above 20EMA with previous range was form and cross the high that would be my entry signal.

Really! If I could do that even 60% of the time accurately I would be very very rich man, sadly I can't.

Though, I can talk about couple of ways which I've tried out, maybe that will be of some use.

First define the TF you are going to trade and on which you want to do this. I mostly trade on short TF, intraday so thats what I'll try to talk about.

First one is little weird, little not so recommended way of mine which I tried when I was yet not familiar with MP and likes of those. Its Elliot Wave, there is lot of back and forth possible here on its relevance or accuracy or even if it is useful or not, but I did try this and it was quite a bust, if I did not have Trailing stops I think I would be out of trading by now. But then again it is possible that you are more proficient in EW than me and can pull it off, it is basically entirely about defining just pullbacks and defining trend continuation/changing waves.

Second one can be considered to be sub part of first, but I note it here seperatly because I used it without first, I would consider anything that has gone below more than 50% of day range as trend change and not just pull back for that particular day, very simple to define even just visually, but this is not a complete thing by itself.

Third one is exactly as weird as first one, it was measuring cycle period of script, for example here I'm linking a chart (not mine and is on much higher TF than I ever traded), just for example, as you can see scripts can have tendency to be in cycles, you would assume its pullback till its broken


Fourth one is MarketProfile+Volume Profile, this is still under study by me but I use it most out of these, because I've had much better results with this than anything else, you simply follow what market auction is telling you. Till last accumulation periods are held, it is pullback, if it is broken there is high chance of this being trend-changing movement. This might not be technically accurate use of MP, but I've tendency to see it like that and this is very helpful in keeping you out of bad trades

Latest attempt I've made at figuring this out is TD sequential, I recommend studying it, even if you don't use it, it's conceptually very interesting. I also don't think I've understood it yet, but I plan to. So just throwing suggestion here.

Out of these second one is still something I use and adore, because its simple and is apt for my intra-day needs and habits, even its not always accurate and may only work in giving smaller trades as you are not projecting a trade here, you are only trying to score little of end movement or possibly get out of the already existing trade. Which I must warn, can be very dangerous business.

You frankly don't know if it is simply a pull back or reversal. I think the best strategy is simply to exit when the bar seems to have stalled and or the new bar has no follow through and instead starts to go the other way.

The amount of retrace defines a reversal or a continued trend with a retrace.
It's also what you define it.

input:
Max_ReTrace_Amt (20);

var: ReTrace(0);

Retrace = 100 -((maxpositionprofit - openpositionprofit)/iff(maxpositionprofit <> 0, maxpositionprofit,1))*100;

var:InReversal (false);
InReversal = retrace >= Max_ReTrace_Amt;

It's a pullback until your stops get hit - then it's a reversal.



But seriously, a lot of this is contextual / in hindsight.

That said, in my personal intraday approach, pullbacks are counter-rotations of at the very least a 1-standard-deviation move -- ideally more toward 2. For example, on the NQ, a 4-point move down (at the time of this writing) from a high certainly does not qualify as a pullback. But a 15-point move down from a high might be worth looking at buying.

It also generally will approach some key reference point(s) like Session Mid, Session VWAP, VPOC, ONVPOC, opening range, etc. for it to be actionable.

Some of this is all just terminology, but to me a trend change and reversal are too very different things. A tend change occurs when price breaks a previous retracement. The idea being that you are buying at a support line on the chart with a stop at the previous retracement low. A reversal is selling into a bullish rally near a presumed top and covering on the dip into a retracement low.

None of this really matters of course as you want to know how to make money and the secret is to keep stops tight and thereby risk costs low. You will get stopped out, maybe often, but it shouldn't matter in the long run. Your issue with getting stopped out is likely more psychological. Recognize there is always another opportunity, and the only thing you can control is your $ risk, not market outcomes. To give yourself confidence you need to step back and analyze the data on all your trades: entry, exit, stop level, maximum low, maximum high. Ask yourself exactly what it is you're trying to capture? and what market volatility am I prepare to accept? If you can capture 30% of a given swing bottom to top you are doing well.

Good luck!

here's my non-expert answer, so take everything with a grain of salt.

say the trend is up. I draw my trendline on a bigger time frame. if thata trend line is broken, and has closed below the last significant "higher low" I start to take caution of anymore buying. I then look for a high price to start selling when weakness shows. look for a formation of resistance, weak candles/doji's and I use those areas for entry on the smaller time frame.

reminder. i'm no pro, but that's how I view them. best luck

snax 

I'm by no means an expert, but I think I can do enough to get the ball rolling in this discussion. I think there are many, many variables at play in this question. Each given day there are times such as the open where volatility is very high which may influence the way price and volume interact to form the patterns appearing on a chart or other tool like a DOM, etc. Then within that scope, each trend has a type of lifecycle, and given the context of where the market is at in that lifecycle can play a big role in the pullback vs reversal question. Trends tend to transform into trading ranges and vice versa which add another level of depth, and then there is your particular time frame(s), in that a pullback may look more dramatic in a finer-grained time frame like a 1min bar chart but just be a single-bar pullback or non-existent on some higher time frame. In my limited experience, during the open I think the market is more prone to sudden reversals during the first 30-60 minutes (or 90 minutes) as the market goes through a process of price discovery and tests different support and resistance levels like the overnight high/low, the prior close, or highs/lows/open/closes on higher timeframes like daily/weekly, or maybe even monthly charts. I see the open as kind of a wildcard asterisk in this regard, and as I learn more, in some ways it is not as scary, but in other ways I find it more and more complex. Given your original question of pullback vs reversal, in the context of the open I think everything just moves a little faster and more dramatically, but after a while you can start to see where the apparent randomness starts settling into patterns and where the pauses, pullbacks, and reversals occur. During a strong opening, a pullback might simply be a pause bar where consolidation occurs before continuation on the next bar of your particular time frameThere are many failed breakouts on the open which inevitably lead to reversals. Taking a given trend and isolating it, I think the problem becomes more of where you are at in a current trend. When a trend is new and strong and in the spike phase, the probability of a pullback is much greater than a reversal, as it seems most reversal attempts are going to fail and everyone is expecting the market to keep going in the same direction. Eventually institutions and traders take some profits and this can lead to long-liquidation breaks (a small pullback in a bull trend) or short-covering rallies (a small pullback in a bear trend) that form pullbacks. They may be a single bar on your time frame or a couple bars at first, but as the trend matures, the pullbacks tend to get deeper until eventually either a trading range forms or a larger correction or "major" trend reversal occurs. To give a shorter summary, reversals tend to happen after excess or exhaustion in an overdone trend that has gone on for quite a while (again this is in the eye of the beholder, where the beholder is likely a collection of institutions and we are just along for the ride), where no one really knows when the trend should end, but the institutions seem to have a clue when it has gone on way too long and its time to cut it off. Pullbacks occur as the market searches for value in a burgeoning trend that still has momentum. And the context is different in trending vs ranged or bracketed markets. I feel like this is a vast topic and I provided way too confusing of a rant in too few words. It is inevitably influenced by the price-action studying I've been doing for some time (al brooks) which I don't mean to evangelize per se, in this case I think this is pretty standard market behavior and not isolated to brooks' ideas, and I encourage others here to call out any points of contention or issues they have as it may lead to a clearer discussion and better understanding for all of us. Thank you for posting, @sadago

In other words, a reversal IS a pullback. If the pullback/reversal happens where there are a lot of limit orders, I look for agressivenes from the market orders. When liquidity has dried up I want to see if the the agressiveness is still there or if it dies and the opposing players start to get agressive to the opposite side. I like to front run this area to get in from the start and if Im wrong I will know immediately.

Great question, I'm glad you asked it.

I'm sure some suggestions will be faster to observe than my suggestion. In addition to those which you mentioned (volume and signal bars), I'd look for:

1) In an up trend I look for lower lows and lower highs and in a down trend I look for higher highs and higher lows.
2) I also look for moving average crossovers (i.e. 20 EMA crossing above/below the 50 EMA).

Glad you asked the question and am looking forward to reading the thread.