How to identify whether it is retracement or reversal?

[investpsych]

Hi Guys,

I am struggling in identifying retracement or reversal,
For example: Please have a look at YMH2 1 minute chart of today's, start from 9:30 AM: First candle green, then it went down couple of points, then it retraced back, I entered in bearish trade and also reached at my target (8 ticks), after that it started going up and I thought it is another retracement and I got in bearish trade on red candle.. after few ticks I stopped out. That means the 2 reversal was not retracement actually it was a real reversal.

Please share your knowledge how to identify them....

 

[Shakone]

You'll never know for certain.

If you make the assumption that price goes one way then retraces then continues, then you also have to assume there's a point where it reverses. Typically you might assume it reverses at a point of support or resistance. Check last week's low (a point of possible support) and check where price bounced and reversed today. If you were aware of this weekly level, would you be as confident that it was just a retracement and enter? Of course on another day it may go flying through there, and it would be just a retracement. You never know, you can just be aware of possible reversal points, bit of common sense, and try to follow what price is doing.

 

[VielGeld]

Experience, mostly.

Generally, for currencies I've found that the further they go, the likelier the move is going to be a reversal. Of course, this is supposing there hasn't been some sort of news item that makes price travel 200 pips in 1/2 an hour or something.

I don't actually trade reversals myself, but I will bank on their continuation if the action looks right. It's all in how well you can read the market.

 

[x4x]

Hi Guys,

I am struggling in identifying retracement or reversal,
For example: Please have a look at YMH2 1 minute chart of today's, start from 9:30 AM: First candle green, then it went down couple of points, then it retraced back, I entered in bearish trade and also reached at my target (8 ticks), after that it started going up and I thought it is another retracement and I got in bearish trade on red candle.. after few ticks I stopped out. That means the 2 reversal was not retracement actually it was a real reversal.

Please share your knowledge how to identify them....

It seems you are scalping on a 1 min chart - it's for you to define a point that constitutes a reversal and everything before that point is merely a retracement - and each traded as such.

The main advantage of trading the 1 min is that you can be responsive to direction changes - use this to your advantage, but have good trade and money management in place - the main thing to worry about and watch out for is tight consolidation, when the bu99er doesn't move anywhere.

 

[investpsych]

Thank you all for your valuable input. I am just reviewing today's 1 minute chart and it was my mistake that I entered in bearish trade without confirmation, I didn't wait for candle to close and price action was in up trend......

Please have a look at attached chart....

 

[VielGeld]

Lol dude, you sold the bottom.

Pro tip: I've noticed the end of a trend often has a strong single push up/down before finally reversing. You can see the red candle there is larger than most.

Nothing to it but exp... Types of candles, pin bars or whatever don't mean ****.

 

[DionysusToast]

First you have to look at the context, in this case the move before the pullback/reversal.

Let's talk uptrends (reverse for down).

For example, if the market made a huge leap upwards on very high volume, it is quite possible that professional traders took that as an opportunity to unwind their positions. Similarly, if you saw huge volume with very little movemement, then the activity has been absorbed which is probably a stronger sign the market will come off. In both cases, a reversal is more likely.

So there's your context.

Then you look at participation. As per this - Understanding Liquidity and Market Pullbacks

You can have areas where the market has temporarily lost its support and even though there isn't a lot of selling, a move down is inevitable.

So - big volume spike to the upside followed by lots of people piling in to the downside - that is probably not going to be a pullback.

On the other hand, a grind up and then a move down with relatively light volume - this is probably a pullback.

 

[wackypete2]

Some perspective: You only get 1 reversal per trend, but you can have many pullbacks. That's why it's so difficult to trade reversals.

Peter

 

[bbmac]

As Pete alludes to in his post above you have a statistically better chance making the working assumption that it's a pullback than a reversal, providing price is indeed in a trend.

What you would be advised to do first is identify what you mean by a trend and how many t/f's it exists on...for eg I tend to use opa (overall price action analysis - peak/valleys) to identify a 'classic' trend. and if this trend exists on t/f's say up to 4hr then there is potentially a strong trend.

When pricce starts to move counter to that trend it will be either be;

a. a pullback
b. an extended pullback
c. a reversal in trend.

Dealinng with each in turn;

a. A Pullback

This will typically be shallow and if you are trying to time the best entrry back into the trend after a pullback then you have to determine which trend - ie using the example laid out above of a claccis opa trend to 4hr, will this be the 5min trend, the 30min, the 1hr trend or the 4hr trend ? For eg price may be trending on t/f's up to the 4hr but the trend starts on the 5min, so I would be looking for the first potential sbr/rbs area on 5min and seeing if any 1min PA etc supports a re-entry to the trend there on any pullback to it, if not then we have an extended pullback;

b. Extended pullback

This will typically be lengthier than a pullback and carrying on with the example above if the 1st obvious potential sbr/rbs area on the 5min failed to hold the pullback and it is extending deeper..so I look for the potential sbr/rbs areas on the 30m/1hr t/f at which I could time an entry back into that part of the trend using 5/15min PA etc... if this fails to hold then I'd be looking to identify potential sbr/rbs on the 4hr and looking to identify 1hr PA etc there to get back with this part of the trend.

Good example on cable recently..price pulls back from last week's/friday's hi in an uptrend that extends to the 4hr..price pulls back and the 1st 5min then 1st 30min/1hr obvious potential rbs fails to halt the pullback but at the previous 4hr swing hi (confluence with 50% of the a-b move shown) we get some 1hr PA that suggests that this may be a good place to get back with the 4hr uptrend, a good 1hr classic hidden divergence set-up there too as well as other suppoirting set-ups by which to time an entry on t/f's below it.

c. A Reversal.

Each potential sbr/rbs on successively higher t/f's that form part of the trend that are not respected by price as price continues to pull back means that there is a greater chance of an opposing trend forming on those lower t/f's and if the last potential sbr/rbs fails on the highest t/f that forms part of the trend then this probably means that the trend you are trying to enter may be over in favour of opposing trend s on the longest t/f it existsed on and/or below - particularly if opa as described above supports this -or- price may just start to consolidate/range.

As to whether there will be a pullback or extended pullback or more well things to look for here include

a. If there is any opposing regular divergence at the highest point of the trend and how many t/f's this extends on
b. the potential strength of the potential supp/res that has caused the pulback or more
c. Price's relationship to it's atr's.

There are no absolutes, just set-ups, analysis of opa conditions and working assumptions. You stand a better chance of guauging wether it is apullback or reversal though if you apply some logical methodology to your analysis.

G/L

 

[DionysusToast]

Some perspective: You only get 1 reversal per trend, but you can have many pullbacks. That's why it's so difficult to trade reversals.

Peter

Unless you have my patent pending 'reversal finder' - guaranteed to find all reversals to within 1000 ticks.

Only $9,999 from your local neighbourhood snake oil salesman...

 

[bbmac]

5min cable a good eg this morning re is is a pullback/extended pullback/reversal ?...price rallied overnight from that 5808 4hr pullbackl lo and continued into the early london session (see 4hr chart above) and at 5874 (top of a previous 1hr swing hi/Daily R1) pulls back...now it is questionable whether the move up from 5808 constitutes a 1hr opa uptrend anyway but lets assume it is for the sake of the example...price pulls back from said 5874 and makes a L below the last 2 x HL on this 5min t/f..it then make sa LH and an equal L so by the time that the 5min hidden div play sets-up - is this really a hi-probability play ? Price is already indicating it might pullback more and indeed it did. Incidentally no potential 30m/1hr rbs there either just 38.2% of the 5808-5874 move up.

G/L

 

[bbmac]

gbpusd eg cont...

In the gbpusd example discussed above price continued to 'pullback' and landed at a previous 1hr swing hi zone confluence with topside of previous 1hr descending trend line that was breeched to the upside in the run up from 5808. Here there was a clear potential classic hidden divergence on 15min - no full set-up as the 15min candle hadn't closed as a trigger for entry but entry was affected by means of the 1min classic regular bullish divergence play before the 15min bullish hammer closed validating and providing a trigger for the 15min classic hidden div play.

Note on 15min the hidden div play didn't come at an immediate HL (preferred) but at a L - this coinciding with a potential HL on the t/f whose uptrend/move the long entry was sought - the 1hr (most importantly.). So still not 'optimum' but better than the potential 5min hidden div play before it not least as there was a confluence of potential rbs/supp factors present also - ie the previous 1hr swing hi zone (prev resistance) and the topside of the prev 1hr descending t/line that was breeched to the upside in move from 5808-5874.

Will price go on to achieve a new 1hr Hi above 5874 ? I have no idea but in any event it was a fair play - hi in probability of at least some pip gain. Had the set-up come at an immediate HL/HL on the t/f it set-up on and the next higehr t/f into whose trend the entry after the pullback was sougght then the probability is generally greater of an uncomplicated follow thru to a new H/HH on that higher t/f, ie in this case above 5874.

G/L

 

[bbmac]

gbpusd cont

Continuing with that gbpusd eg...let's assume for sake of argument that the move from 5808-5874 was an opa 1hr up trend (very debatable) if this 15min hidden div play doesn't result in price making a new 1hr hi above 5874 then it is now very doubtful whether the uptrend is present/still presnt on 1hr re opa...ie if the current 1hr pullback lo where this set-up developed is breeched to the downside.

This is not to say that price will not move higher just to say that the chances of gaining an entry back into the 1hr uptrend are much reduced using classic pullback/extended pullback 'buy the dip/sell the rally' techniques.

G/L

 

[price777999]

Hi Guys,

I am struggling in identifying retracement or reversal,
For example: Please have a look at YMH2 1 minute chart of today's, start from 9:30 AM: First candle green, then it went down couple of points, then it retraced back, I entered in bearish trade and also reached at my target (8 ticks), after that it started going up and I thought it is another retracement and I got in bearish trade on red candle.. after few ticks I stopped out. That means the 2 reversal was not retracement actually it was a real reversal.

Please share your knowledge how to identify them....

IMO the markets are random therefore its impossible to predict a retracement or reversal .

All you can do is go with the percentages , for example if price is moving down and then consolidates there is a 52% chance it will continue moving down .

Thats the way I see things anyway .

 

[bbmac]

gbpusd eg cont...

Just to illustrate the point (s) I was making in posts above and continuing with today's gbpusd PA. I mentioned that there is an optimum place to try and time a re-entry to the next higher t/f (+) trend and that in the case of an uptrend this would be a HL on the t/f below that it sets-up on and this co-existing with a potential HL on the t/f the trend is on. So for example on the 15min we saw that hidden div set-up and shown above at potential 1hr rbs but @ a L on 15min/potential HL on 1hr...this happens often - ie it is not always possible to see an optimum HL/potential HL respectively.

With this eg price rallied from that 15min L but found supply at the potential sbr on the 15min of the HL to see a further leg down to a LL on this 15min/potential HL on 1hr...price rallied again from here ( a good regular bullish div set-up on 5min on which to time enntry) but has since gone into a rangy mode and as I type this actually has made a strong leg down below that 1st LL on 15min - thus illustrating the point.

G/L

 

[price777999]

Re: gbpusd eg cont...

Just to illustrate the point I was making in posts aboev and continuing with today's gbpusd PA. I mentioned that there is an optimum place to try and time a re-entry to the next higher t/f (+) trend and that in the case of an uptrend this would be a HL on the t/f below that it sets-up on and this co-existing with a potential HL on the t/f the trend is on. So for example on the 15min we saw that hidden div set-up and shown above at potential 1hr rbs but @ a L on 15min/potential HL on 1hr...this happens often - ie it is not always possible to see an optimum HL/potential HL respectively.

With this eg price rallied from that 15min L but found supply at the potential sbr on the 15min of the HL to see a further leg down to a LL on this 15min/potential HL on 1hr...price rallied again from here ( a good regular bullish div set-up on 5min on which to time enntry) but has since gone into a rangy mode and as I type this actually has made a strong leg down below that 1st LL on 15min - thus illustrating the point .

confuses the hell out of me :|

 

[bbmac]

Re: gbpusd eg cont...

I'd better not post anything complicated then !

G/L

confuses the hell out of me

 

[bbmac]

I suppose what I am saying (to sum it up) is that if you are seeking to effect an entry into a trend that may exist on a certain t/f (and possibly on t/f's higher) by dropping down a t/f and timing an entry after a pullback on that - ensure that that lower t/f (and that immediately below - but particularly the one you are using to enter )aren't showing overt signs of weakness suggesting that an extended pullback or indeed a reversal/ranging/consolidation is the greater probability as opposed to a fairly uncomplicated 'with trend' follow thru to a new HH or LL in the trend. It goes without saying therefore that the ' trend ' t/f shouldn't be showing signs of weakness in it's trend either.

I.e. I apply intelligent and robust methodology to it centred around price action that tells me what the greater probability is [whether that greater probability plays out or not.] This enables me to avoid trying to buy every dip/sell every rally in a trend and to get involved in a trend after a pullback only in the highest probability PA etc circumstances.

Hope this is clearer.

G/L

 

[price777999]

I suppose what I am saying (to sum it up) is that if you are seeking to effect an entry into a trend that may exist on a certain t/f (and possibly on t/f's higher) by dropping down a t/f and timing an entry after a pullback on that - ensure that that lower t/f (and that immediately below - but particularly the one you are using to enter )aren't showing overt signs of weakness suggesting that an extended pullback or indeed a reversal/ranging/consolidation is the greater probability as opposed to a fairly uncomplicated 'with trend' follow thru to a new HH or LL in the trend. It goes without saying therefore that the ' trend ' t/f shouldn't be showing signs of weakness in it's trend either.

I.e. I apply intelligent and robust methodology to it centred around price action that tells me what the greater probability is [whether that greater probability plays out or not.] This enables me to avoid trying to buy every dip/sell every rally in a trend and to get involved in a trend after a pullback only in the highest probability PA etc circumstances.

Hope this is clearer.

G/L

what you mean is ..sell when it's going down init ?

 

[bbmac]

Actually no - what I am referring to is exactly the opposite - ie finding the optimum places to buy when it is going down/pulling back in an uptrend or sell when it is going up/pulling back in a downtrend and avoiding the non-optimum places as they are lower in probability of a successful outcome over any extended sample. Init.

G/L

what you mean is ..sell when it's going down init ?