Strategy development

[zippy]

"There is no essential difference between a pullback and a retracement unless one assigns a difference to them".

I believe there is a difference between retracement and pullback. Retracement is in terms of fibonacci numbers, such as 62%, 38% and 50%. However "pullback" can only be applied when a market is trending in one particular direction but pauses/pullbacks due to profit taking or stoplosses being triggered before moving off in the same direction.

 

[dbphoenix]

"There is no essential difference between a pullback and a retracement unless one assigns a difference to them".

I believe there is a difference between retracement and pullback. Retracement is in terms of fibonacci numbers, such as 62%, 38% and 50%. However "pullback" can only be applied when a market is trending in one particular direction but pauses/pullbacks due to profit taking or stoplosses being triggered before moving off in the same direction.

And how are you defining "trending", "pause", and "pullback"?

 

[sulong]

Everyone has the option of defining words however he chooses. However, this can lead to communication problems if the words happen to be commonly used.

There is no essential difference between a pullback and a retracement unless one assigns a difference to them. What is more important is whether the "*" takes place in a trend.or not. In which case, one gets into the necessity of defining trend, and whether or not it's possible to have a trend within a range.

All of which gets back to the necessity of imposing one's own structure on what he sees, part of which is determining whether or not a given pullback or retracement or whatever is "important".

The difficulty I'm having, came up when I started refining my rules for a reversal trade, and determining entry opportunity's.

For instance, the second leg on a double top / bottom.
Once my conditions have been met on the first leg, and then on the intervening ( what I call the automatic reaction), and then if the second leg begins to form, my question to myself is, do I call this a pullback / retracement from a AR? or do I call it a double top / bottom?

So this is how my whole recent thought process on "what is a pullback" got started.

Perhaps I need to think in terms of "PB / Ret" from what, opposed to "what is a pullback"

I just want to make my plan / rules as clear to my self, and others as possible.
So my job continues.

 

[zippy]

defining trend, pause and pullback

And how are you defining "trending", "pause", and "pullback"?

A trend is the direction of the market making peaks and troughs, commonly known as highs and lows. As I said earlier, the market moves in 3 ways, uptrend, downtrend and sideways.
The daily gives us only 1 bar but when using 5 minute chart we see a lot of movement in terms of peaks and troughs thus painting a different picture. So the perception of a trend differes depending on what kind of trader you are, a day trader, a position trader etc.

As regards " pause", say the price is trending upwards, making higher highs and higher lows on a 5 minute chart ( the 60 or 30 min might tell us a different story). After making a higher high the price, stalls or pullsback, allowing profit takers to come out, triggering stoplosses then the price continutes in the same direction. This allows the traders who feel that they missed the earlier move to jump in. " Pause and pullback" mean the same thing to me.

 

[zippy]

Semantics

DBP is righ to a certain extent about the risk of a thread descending into a discussion based purely in Semantics

I appreciate what you are saying. To proceed any further we need to get the semantics and definitions out of the way. No harm in those following this thread to come up with their own definitions!

 

[dbphoenix]

The word "semantics" keeps popping up, but it serves only as a rationalization for a failure to define just what it is that one is going to do. This is intended as a constructive criticism since the failure of traders -- beginners and not-so-beginners -- to distinguish between a retracement and a reversal is what leads so many to trade counter-trend.

It is a mistake to trade something that hasn't been tested, and it is impossible to test what has not been defined, and semantics have nothing to do with the process of defining just what it is one is looking for.

For example, assuming that one has defined "uptrend" as higher highs and higher lows, does that mean that a bar that is a single tick higher than the previous bar (and whose low is a single tick higher than the previous bar's low) defines an uptrend? Or does it take two ticks? Or three? Or must the higher high be a swing point? And how is one to define a swing point? Only one adjacent lower high on each side? Or two? Or three? And isn't the "pullback" that defines the swing point an entry opportunity if one is trading "retracements"? How many ticks is a pullback? One? Two? Three? Six?

Dismissals of these kinds of discussions by invoking "semantics" evades the issue, which is not "semantics", but vague and generally meaningless "definitions" which cannot be applied to the trading process. If one's definition, whatever it may be, does not tell him to take this or not take this at the time when he must decide whether to take it or not, then it's useless.

 

[JumpOff]

The word "semantics" keeps popping up, but it serves only as a rationalization for a failure to define just what it is that one is going to do. This is intended as a constructive criticism since the failure of traders -- beginners and not-so-beginners -- to distinguish between a retracement and a reversal is what leads so many to trade counter-trend.

I'd like to know more about this. JO

 

[Quercus]

I absolutely agree dbp, as I spent most of yesterday poring over charts of NQ,YM, and ES in an attempt to identify, some areas of repetition which would assist in system development. I came away tired, confused and no further forward, other than realising that yes this is as hard as I thought!
Part of the confusion lies in the definition stage, which is what is being discussed above. In other words - am I seeing a pause for breath before a continuation of what was occuring before recommences, or am I watching the development of a complete change in direction?
Are you saying that it does not matter how the pattern is described, as long as it is clear in the observers head what it is they are watching? Then that same observer can use their experience to apply their own rules on how to enter based on what they alone perceive. Is this what is meant when people bang on about how all traders are different and we all need our own methods and systems, adapted to suit our personalities, in the most appropriate timeframe?
One thing I do know is that I personally need some strictly defined set of criteria, with known MFE, MAE, number of consecutive losses etc etc, otherwise I will continue to chase my tail in never ending circles, just like my dog does on occasion. She just gets tired - I will suffer a worse fate I'm sure!
Cheers
Q

 

[dbphoenix]

Part of the confusion lies in the definition stage, which is what is being discussed above. In other words - am I seeing a pause for breath before a continuation of what was occuring before recommences, or am I watching the development of a complete change in direction?
Are you saying that it does not matter how the pattern is described, as long as it is clear in the observers head what it is they are watching? Then that same observer can use their experience to apply their own rules on how to enter based on what they alone perceive. Is this what is meant when people bang on about how all traders are different and we all need our own methods and systems, adapted to suit our personalities, in the most appropriate timeframe?

Each of us trades the market as we perceive it, i.e., we don't trade the market but rather our perception of it. And we perceive the market according to our beliefs regarding it. Therefore, one who perceives the market as random will trade it one way, one who perceives it as being non-random will trade it another. One who sees it as manipulative and out to trick him will trade it differently from one who does not, one reason why so many of the "discussions" on message boards fragment so easily, i.e., everyone is operating on different belief systems.

Therefore, it's up to you to decide what you believe about the market. Few people want to think about that, which is why indicators and mechanical systems are so popular, regardless of how well or how badly they work.

 

[barjon]

For example, assuming that one has defined "uptrend" as higher highs and higher lows, does that mean that a bar that is a single tick higher than the previous bar (and whose low is a single tick higher than the previous bar's low) defines an uptrend? Or does it take two ticks? Or three? Or must the higher high be a swing point? And how is one to define a swing point? Only one adjacent lower high on each side? Or two? Or three? And isn't the "pullback" that defines the swing point an entry opportunity if one is trading "retracements"? How many ticks is a pullback? One? Two? Three? Six?

.

Ah, yes. Definitions need to be sufficiently taut that if 100 traders read your rules they will all do the same thing.

How's this:

An uptrend is a prolonged period of rising prices that ends immediately after you have identified it as such and bought into it. A retracement is a short period of falling prices after an uptrend that ends immediately after you have decided it is a reversal and gone short. A pullback is that nervo/ muscular phenomenon that lifts your finger from the trigger finger to prevent you taking an early, small loss in the above. This is followed by a breakout which is the sweat on your brow as you become over-extended. Resistance is the mental attitude that insists that the market is wrong and will turn to meet your analysis. Then, of course, you try to gain support by casting around on bulletin boards desperate to find someone who shares you view. Finally, a test is a mental examination at your local clinic after you have been found lying in the street pounding the pavement, mouthing gibberish and shouting "why does it never do what I want it to".

good trading

jon

 

[erierambler]

The word "semantics" keeps popping up, but it serves only as a rationalization for a failure to define just what it is that one is going to do. This is intended as a constructive criticism since the failure of traders -- beginners and not-so-beginners -- to distinguish between a retracement and a reversal is what leads so many to trade counter-trend.

I'm still following along and you are right Db, one needs to get right down and define it.
Retracements. There are two kinds of retracements. If there is more please add. To start I understand there is :

1. Price retracement (a) internal
(b) external
2. Time retracement

Is this a start?

erie

 

[the blades]

Ah, yes. Definitions need to be sufficiently taut that if 100 traders read your rules they will all do the same thing.

How's this:

An uptrend is a prolonged period of rising prices that ends immediately after you have identified it as such and bought into it. A retracement is a short period of falling prices after an uptrend that ends immediately after you have decided it is a reversal and gone short. A pullback is that nervo/ muscular phenomenon that lifts your finger from the trigger finger to prevent you taking an early, small loss in the above. This is followed by a breakout which is the sweat on your brow as you become over-extended. Resistance is the mental attitude that insists that the market is wrong and will turn to meet your analysis. Then, of course, you try to gain support by casting around on bulletin boards desperate to find someone who shares you view. Finally, a test is a mental examination at your local clinic after you have been found lying in the street pounding the pavement, mouthing gibberish and shouting "why does it never do what I want it to".

good trading

jon

Ah - someone else who sees the same patterns as me.

 

[roguetrader]

ROFL barjon

 

[dbphoenix]

I'm still following along and you are right Db, one needs to get right down and define it.
Retracements. There are two kinds of retracements. If there is more please add. To start I understand there is :

1. Price retracement (a) internal
(b) external
2. Time retracement

Is this a start?

erie

My point is not that a group of people should come up with generally accepted definitions of terms but that the individual at least should know exactly what it is he's looking for. After all, if he doesn't know what he's looking for, how will he know it when he sees it? Chalking this stuff up to "semantics" does not address the damaging effects of failing to distinguish between a retracement and a reversal. Not that doing so is easy. This particular problem plagued Dow and Hamilton a hundred years ago.

Nor am I suggesting that this thread is the place to work out these definitions if a group of people were to decide to do so. It is, after all, sulong's thread. And he can define them however he likes. And if no one else agrees, the only problem is communication (which is a problem anyway).

But the simplest things trip up the beginning trader. For example, a "retracement" has by definition to be retracing something. That something is usually thought of as a directional move of some sort. If there a difference between a directional move and a trend? If not, can a trend take place within a range? If not, should one look for retracements only after price has left the range and view anything else that goes on within the range as chop or noise? Add to that the usual curve-fitting, data-mining, survivorship bias issues that arise when "testing" a particular idea, much less a setup, and one can see why so many people get lost.

 

[sulong]

I'm still following along and you are right Db, one needs to get right down and define it.
Retracements. There are two kinds of retracements. If there is more please add. To start I understand there is :

1. Price retracement (a) internal
(b) external
2. Time retracement

Is this a start?

erie

Erie,
db can respond to you if he likes, I just wanted to put my own thoughts in this.
Retracements come in all shapes and sizes, and in a number of locations of the price charts.
Each of us can start by making just a few parameters in which all perceived retracements are confined.
After that, we need to recognize that all ret's are not created equal, so then we tighten up our parameters, to only encompass those ret's that have a higher success rate, that all of them combined.
We can do this by adding "what came before" and volume to the mix, and then weeding them further.

At some point, we need to decide if we want to participate in all ret's with a 50% success rate or more, or maybe only those with a 60% or more success rate, or 75%...whatever.

When we get to this point of deciding, we know whats an important ret, and what is not.

After all, a retracement is only a way for price to seek continued participation.

PS. I see db already responded, but I'm posting this anyway.

 

[dbphoenix]

After all, a retracement is only a way for price to seek continued participation.
.

This is the key, but for some reason, it just doesn't stick. And it may help the budding trader distinguish between a retracement and a reversal.

A successful retracement becomes a continuation. It becomes a continuation because enough traders took advantage of the retracement to make it a continuation. Therefore, if one enters a retracement with the expectation that it will become a continuation, he's going to have to ask himself why he thinks this retracement is such an extraordinary opportunity that somebody -- actually, many somebodies -- will join him in jumping on it and propelling it in the desired direction. If he can't come up with a reason, or even ask the question, then he's just playing the slots.

 

[bracke]

Is there no glossary/ dictionary of terms that professional traders use to ensure standardisation when communicating with each other ?

dbphoenix

Your post 130 penultimate line What is a mechanical system ?

Regards

bracke

 

[bracke]

I have had a hunt round and found the following:

Pullback

The downward reversal of a prolonged upward price trend.

Retracement

A reversal in the movement of a price, countering the prevailing trend. Occurs outside of a range.

Reversal

A sudden change in price direction. May also be called a trend reversal, rally or correction. Occurs within a range


And before you ask dbp, I would not want to define - prolonged, sudden or any other. I will leave that for others more experienced than myself,such as yourself.

Regards

bracke

 

[sulong]

I would not want to define - prolonged, sudden or any other. I will leave that for others more experienced than myself,such as yourself.

Regards

bracke

Then whats the point of your participation in this thread?

If you're not willing to do the work, then go away.

 

[bracke]

Then whats the point of your participation in this thread?

If you're not willing to do the work, then go away.

sulong

What on earth are you talking about !

If my last post is not doing some work, what is ?

My comment to dbp was meant in a jovial manner not in the way you have taken it.

If you got out of bed the wrong side don.t take it out on me.

Regards

bracke