When i’m defining the trend in a chart it comes with a lot of subjectivity and thats confussing to me so i want to create a 100% rules based way for how to read the trend but i have troubles finding the right rule for defining a pullback / retracement.
First of all, for defining an impulse leg on a chart i have a rule that it must have a higher high higher close or a lower low lower close of the previous swing high or swing low. BUT i have not found a rule for defining the pullback/retracement, i have thought of certain elements as using fib retracement levels, a minimum of x candlesticks, 2 higher high higher closes / lower low lower closes after each other, …
But nothing seems to click in my mind.
Are there people that have the same issue as i have or do you have a solution?
Please feel free to leave a comment below.
These are familiar approaches. You can play around with the number and combination of lower highs and lower closes but possibly without altering your results much. This assumes you have got a firm and valid definition of a trend.
What matters is defining the trends that will be best to get into, sticking to rules that are working, and most of all planning your exit - the exit is much more important than the entry.
I only trade 5min chart - i think this set up works on any chart timeframe.
Using the 8EMA and 20SMA you will see candle pullback through 8EMA toward the 20SMA
Of course, this set up only applies to trending markets.
If candles come back through 8EMA pullback is confirmed and a good entry on close.
If candles continue in reversal then a cross over of 8EMA and 20SMA occurs.
Quite a simple set up but often simple is best. “Occam’s Razor” principle.
Exit can be when MAs start to converge or when a large extinguishing candle appears (grab it !)
I think the issue here is that you have a definition for what makes an impulse leg, defined by actions in the “previous swing high or swing low”, but you don’t have a definition of what a swing is. Once you can define a swing (which can be done in as many ways as you have creative ideas) then you can define pullbacks/retracements using the standard ABC or 123 wave.
For the sake of showing an example, I’ll use the standard mt4 zigzag indicator which defines a swing as price moving x% (or something like that). Once the swing points are labeled I might define pullback and impulse based on the break of the previous legs reference points (high/low)
Putting that together into a chart:
So perhaps the answer to your question is that a pullback is anything that isn’t an impulse, but again both of these are classifications of a series of swings, so it really depends on your swing formula.
