BPA trading room Q&A: March 18, 2015
Question: I have trouble working out when to enter on a pullback directly above or below the prior bar, or one point above or below. I want to wait for a deeper pullback, like a 50 percent pullback before entering. Any tips on when to get in early and when to wait?
Video duration: 2min 30sec
When to enter pullbacks
One of the things that I really enjoy about trading is that it is so subjective, but that’s also one of the things that makes it really frustrating for traders. Everyone wants rules. “Do this, you make money. Do that, you make money.” And if you think about it, rules are impossible because if there’s a rule, then it’s a perfect trade. You do it and you make money, right? However, there has to be an institution taking the other side of the trade, and it’s not going to take long for the institution to realize that every time they take that particular trade, they lose money and you make money. So they’re going to stop doing it, and all of a sudden you’re going to stop making money. And that makes everything constantly subjective.
In general, I think a trader starting out should not be buying with limit orders even easy trades, like 58 — 58 low. Really high probability that there’d be buyers below. What’s high probability? 70 percent, 80 percent; really high probability. Not necessarily within one or two bars, but certainly within four or five bars chances are, there’d be buyers below here [B58] before the market gets below here [B57]or below here [B56].
So if you’re ever going to buy with a limit order in a bull breakout, the only time you should consider it, is on the very first reversal up after a strong breakout. And then beyond that, if you have a weaker trend, like in here [B6-B12], then you’re expecting a lot of two-sided trading so you’re expecting deeper pullbacks. This is the kind of environment where traders would consider entering on 50 percent pullbacks. So rally here and guess what? Traders bought the 50 percent pullback.
Sell off here but within a trading range, so what do you think happened? Bears sold the 50 percent pullback, right? That just happens all the time. So the more two-sided the market is, the more likely pullbacks will be deep and the more likely traders will be looking to wait for 50 percent pullbacks. The stronger a trend is, the more likely pullbacks will be small and traders will not wait around for 50 percent pullbacks.