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Technical Trading – Enter At Market or Wait for Pullbacks
Couple of questions in the feed from Amir and Pribham, and a few others as well, asking “When should we enter at market “and rather wait for a pullback?”
Now the question to this answer deals a lot with probability rather than strict, hard and fast rules. The challenge we often face in trading is trying to find a rule that always works all the time, right? But the truth is, in trading we need to find the highest probability opportunity rather than work in complete certainty. Now, to answer the question, there’s a couple of variables that we need to consider for this equation.
HELP WITH ENTRIES AND EXITS – ENTER AT MARKET OR WAIT FOR PULLBACKS
Firstly, is the reason for entering the trade. For example, what is the sentiment that is driving that pair at that time? So, generally speaking, when the sentiment is very fresh, it’s very strong, that can be an opportunity for us to enter at market. And when the sentiment isn’t as strong, meaning that there’s not a really strong conviction, we could rather wait for a pullback or a retracement.
Now, the second consideration, in line of the first one, is the question about the type of news that we’re trading or the type of sentiment we’re trading. Are we trading a very unexpected, strong sentiment shift from something that has happened or is it just a regular, daily, risk-sentiment-based trade, for example?
Obviously, expectations here is very important. For example, if we have a central bank meeting and the market is expecting the central bank to cut interest rates and be very dovish and they come out deciding not to cut rates and they come out very hawkish, and that goes against all of the expectations and that is a very big sentiment shift and definitely something that we can just enter at market without waiting for a pullback.
Now, the third thing to consider is volatility and volume. The average daily range is a very helpful tool, like we have on the charts over here. That basically gives us the probability of upside and downside for any particular instrument based on the pre-determined look-back period.
So, for example, let’s say this pair moves about forty pips per day and it has moved about 40 pips per day in the past two weeks, we would expect the pair to track within that 40 pip range as an average volatility point of view.
Now, also in line with this part, we also need to consider the chart, itself, right? So, support resistance areas, psychological levels, fair value areas, to see where we might expect support resistance to come into the pair. So if are trading risk sentiment, and by the time we get to our screen let’s use the Aussie versus the U.S. dollar for today as an example, we get to our screen and we see the sentiment is very strong and the pair hasn’t really moved a lot. It’s still got a lot of room left to the downside in terms of ADR. No major labels that we need to consider, only the ones down here. If we are over here and the sentiment is strong, that is definitely an area that we can decide to enter at market without waiting for a pullback.
Now, if we go to the screen on the other end, and the sentiment is still strong, it’s still fresh, but the pair has already moved a quite considerable amount, it’s already reached that ADR low, it’s already reached a significant fair value and support area. Once that has happened, the highest probability opportunity is actually waiting for a retracement or a pullback before we enter the trade again. Now, in such a case, obviously, it’s better to wait for a pullback. We might not always get that pullback, which means that we might miss the trade. We could wait for a potential break again and then wait for a pullback again but it all comes down to probabilities.
Having moved so far, we need to consider what is the highest probability from that point onwards. Now, when we get to our screens, when we got to our screens today, for example, the majority of the pairs that we were looking at already reached their ideal lows, they already reached that significant fair value and support areas in the chart.
So the highest probability opportunity for us was to wait for a pullback rather than selling at the lows. Now, obviously in hindsight, right, we could’ve said “Yes, it was easy to know “I should’ve just sold at market.” But the thing is on another day with similar type of market conditions, you might have seen a pullback when it reached that level, which would have mean it would have been better to wait for that pullback for the higher probability opportunity.
A good example is what happened with the retail sales. We had retail sales come out. We saw lots of moves to the downside. Got a lot of questions saying that “Should I sell at market?” “Should I sell at market?” And the thing is with that retail sales event, even though we had a miss, it was really, fairly in line with expectations.
So we didn’t expect a very strong move following that retail sales event. And what happened is we did see quite a considerable move to the upside now in terms of pullbacks. So if you entered here at market, going against the hightest probability opportunity, you would have been in a stressful situation now with a pair going against you, making that highest probability move from here, which is a pullback.
So, you know, there’s lots of things that we need to consider. Lots of things that we need to look at, in terms of variable wise. But if we follow that process of always looking for the highest probability, instead of, you know, looking for a hard and a fast rule, that’s normally the best way, especially in the long term, of making sure you’re staying on the right side of the market.
So, Amir and Pribham, I hope that helps as well as the other subs that ask about that. If you guys want more clarity on it, don’t hesitate to ask us.