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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.
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.
I think it would be great if I could, but I don't know of any reliable way to. In hindsight, it always looks like it "should have" been possible to know which it was, but you can't trade in hindsight. I don't truly think it's possible, actually.
I do try to exit soon enough if I have been in a trend and it starts to go the other way. I just use a trailing stop, and accept the fact that I will sometimes exit unnecessarily in a pullback, and always a little late in a reversal. I would be happy just taking some of the trend, and don't seek perfection.
Once price action seems to become more clear, I will decide whether to re-join the trend I jumped out of, if it still looks strong, or whether to join a possible reversal, or whether to wait some more.
I favor being cautious about making these decisions.
Sorry to only have this answer, but after trying to judge more precisely what price will do, I have come to accept that I need to wait to see what it is doing... and control the losses when I'm wrong.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
Great question and I'm sure you will get a lot of feedback with different ways to determine this and in this cherry picked chart, this is how I determine it.
Every now and then I may look at an area where I thing price might turn, however, I don't take any trades until there is confirmation. The only way I truely have that confirmation is when price breaks above or below the previous correction (LH/HL). You also need to consider what price action or order flow you are following. In the first picture I have outlined the different price actions by color (Long term, intraday, immediate). You can see if following the intraday price action, we get confirmation that price might continue higher when price closes above the previous LH for the intraday price action. Now we look for longs. At the top of the pic, you can see that price has closed above the longer terms LH, so if we are trading the longerterm price action, now we shift our bias to long. Doing it this way, price lets you know when it more than likely has reversed direction. Up until I get that close above/below I trade every signal as a pullback. Probability will be on your side and in the long run you will see you will be on the right side of price, rather than trying to pick the top or bottom and then price continues in its original direction.
in my view you should never let a single candle dictate what the market is doing.
The first sign of a reversal should be a change in the market structure. A pull back should follow the current structure and either make another HL or a LH.
an EMA is great for showing this
-P
"Truth is not what you want it to be; it is what it is, and you must bend to its power or live a lie"-Miyamoto Musashi
You have exactly given the background reason for my question. Quite a few times, i see stop loss getting triggered and watching it to go exactly in the predicted direction alas hitting the target price too. Can’t keep increasing the stop loss as it skews the risk/reward.
Thanks for the example. In this euro chart this is what I would have done.
On Oct 2nd, seeing that big bull bar enter long with a stop loss marked around immediate low bar prior to this long bull bar. Now that stop loss would have triggered on Oct 9th, with most of the time my trade is hovering around fractional profit/loss. Just as I watch, the market in the coming days zooms in the long trend making me to bite my nails and cursing my bad luck -
Now, typically I dont hold positions overnight, but this exact picture repeats during intraday cycle too.
Thats pretty much what I was trying to get at. lol.