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Accumulation pullback leg play

Updated: Sep 30, 2019

Accumulation and distribution periods in market are constant process of exchange. The difficulty is to find what variables might indicate that market is in accumulation phase or not, it is all very easy after the fact, but to find variables with edge it is harder task. Pullback is the word that will be used to define the accumulation section of price after the initial impulsive bullish move. The length of impulsive move is more or less irrelevant , what matters the most is how strong really the move is (how many candles it took, how strongly did volatility change and what volume was traded in impulsive leg).

First to establish in pullback leg is context, which is the most important part of it. Without proper context there is no real "pullback" because what is the price really pulling back against? Before the pullback, market needs to establish strong impulsive bullish leg. The strength of actual impulsive market move has to be quicker and stronger than the pullback move, which is expressed in numbers of candles and the pips / points / cents distance it traveled within its leg. Therefore strong impulsive bull leg and then weaker / softer pullback leg that is consolidating as it is dropping.

Conceptual example (strong impulsive bull leg followed by softer pullback leg, simplified presentation from higher TF with less candles just for sake of better view):

Without actually listening to that, trader is heavily over-simplyfing the conditions which means its no longer a point to even strap a pullback or impulse name to anything, it becomes a blur. Context is what matters the most.

Bellow are few examples of volatility scale comparisons within the legs. Impulse leg should be at minimum 2X the volatility scale of whole pullback leg, and the pullback leg should logically fit to how trader judges where the leg starts, based on volatility and bear/ bull market moves differences and symmetry.

Summed up: variables for accumulation / distribution pullback leg play

Market presence: All markets from complete penny stocks to most liquid assets such as EURUSD. Accumulation and distribution patterns are present in every market.

Research procedure (historical charts): First trader should focus on having bullish impulsive move or up trend (for accumulation play) or down trend (for distribution) on chart he is looking at. The key is to focus on clean impulsive trends, not just any trend. By impulsive meaning that trend moves in very strong one sided direction, with minimal pullbacks in between.This condition has to be met, in order to filter out weaker plays and to make search process easier. Structure of pullback leg (acc or distr) should have progressive lower highs and tightening towards right side of chart. Those conditions have to be met when looking for those on historical charts. It takes a lot of screen hours to identify play actively at live market, and the best way to do it is to practice on historical charts first as much as possible.

Hunting procedure in live market: Flipping trough assets in software such as MT4 or TC2000, it is completely normal if trader flips over 100 assets and does not find any decent play. This procedure is not meant to actually trade them, but just to get enough search experience and watching potential accumulations how they develop trough live market. For actual trading , accumulation is only a micro pattern which means that there should be additional macro variables behind the play before executing it (for example asset in play).

Positives: Present in every single market, highly frequent patterns.

Negatives: Not a high edge play (weak alpha), it needs tight SL (stop loss) management otherwise trading it will be unprofitable.

For un-experianced traders it could also be difficult to tell which highs and lows in structure are key to watch for accumulation "confirmation". It takes a lot of practice, this is not something that one reads and then becomes good at.

Accumulation / pullback leg play

Bellow is conceptual presentation of pullback leg after impulse, in stages:

Once the first stage is established and strong momentum leg is baked, trader has context to start seeking for potential setup. There is no clue yet that price will bake such setup, but the first condition is there which means there is some probability for it, without it there is no point to wait for such setup. Once the fist stage is baked, second stage which is pullback retrace leg needs to start to develop and there are many different ways this can happen. One is soft and slow way where the price takes a long time to build such leg with many candles in structure, or it can happen very quickly and every big dip gets quickly bought back up until imbalance shifts to bullish side with higher high bake. Either way is an consideration.

Structure could either have symmetrical / even highs or it could have lower highs. Very important aspect, structure should not have higher highs in between, because that reduces the liquidation cascade move once supply / demand balance starts to shift.

Bellow is example how highs should progressively develop in structure (left) and right example is one that trader should avoid. Simply due to larger cascade move chance if structure is set as shown on left example (due to un-liquidated stop losses and exit areas around supply).

Impulsive bull leg ahead of structure should represent aggressive market aggression on ask (traders removing liquidity and pushing price higher). Accumulation leg however, is the opposite of it where the main orders are not aggressive, but passive limit orders soaking and adding to liquidity (for example buyers holding the bucket to soak the offers inside accumulation period). Both of those counter processes can be best observed on futures market with indicators that display only bid / ask aggression so that trader can note and spot the accumulation period from the absence of aggressive orders. There are plenty indicators for Ninjatrader8 that show bid / ask mkt orders generally all of them doing the same job. Or watching Level 2 / tape very closely does the same job as well.

Bellow is conceptual presentation of impulsive heavy market order (ask) bullish leg on X equity ticker, M1 time frame (left) compared right to M5 time frame (the impulsiveness of move is defined by maximum DD (drop against bull move) of its upward move, which is no more than 2 ticks, 1 tick is 1 square). Example bellow is just to note how strong should impulsive move be relative to the minimum ticking distance on asset (bid-ask). This is just "prefered" example for sake of theoretical explanation, but in real live markets obviously there will be a lot more asymmetry to it.

Trader should observe the pullback structure if buyers are picking up and accumulating on sell orders and especially observe how strong bull legs in pullback structure are compared to bear legs. In general bullish legs should be stronger, for A grade play.

Strong momentum ahead of pullback leg will almost always be precondition to good setup, almost always. And if not that, then a heavy symmetry would be next clue. On weak impulsive move the quality of play drops under A grade by default.

Picking good setups is all about future realistic expectations, thinking when should one expect higher number of such setups? To answer that one should think when its more likely to expect strong impulsive market order momentum. Bellow conditions often fit:

-near first 30-45 minutes of market open on equities . -after news reports / events for FX and crypto. -after liquidation has been baked on specific asset with a short squeeze for example. -after long established condensed structure gets a squeeze.

Personally i put focus on large cap equities with strong news to look for this plays, or equity assets that are up nice % on a day as well as small cap equities that are rigged by market maker and holding above 50% gain on a day. In FX after central bank rates news is usually best to focus, especially on surprising news that market did not yet had to chew on (NZD news of August for example).

Progression of pullback leg highs pointed on example bellow. Lows in structure could be even (flat), higher lows or lower lows , it does not matter that much how lows progress in structure, the focus is mostly on highs. Highs should progress from first highest high on left, to lower and lower highs towards right. Highs could progress in strong or softer progression (being more flat-even or having larger price dip on each new high) either way is okay.

Trade management on pullback leg accumulation play

Entry on play should be when price makes first significant higher high, breaking last formed lower high. The move should be on decent volume if possible. After last high is breached, price should not retrace more than 50% of the last leg distance (measured from the low to high). Basically on plays where price dips over half distance of last leg (after breaching previous high initially) it is very likely that it will fail to push forward, this is based on huge amount of gathered data i did for this setups. On best winning plays price will move straight up higher after breaching last major lower high.

Profit target should be minimum whole depth of structure replicated. Basically if one measures from the deepest low to highest high in structure, this distance should be replicated on the move after setup becomes "valid".

To sum it up:

Entry: Breach of last / recent lower high (or starter near the lows for better average)

Exit: 1:1 structural depth replication

Stop loss: Half of last bullish leg

Entry can be also anywhere elsewhere, if Level 2 gives a soak or strong bid to lean on.

Conceptual presentation:

Accumulation pullback leg examples:

Things to consider for trading or validating the setup: There should be at minimum 3 highs and lows in structure , but prefered is more than that. This is a must, otherwise one cannot really tell if accumulation process is happening, since that process requires time to pass by, which by default means price will have higher chance to form some structural extremes over time.

Two types of pullback leg rotation setups are present in market, one is symmetrical and the other one is asymmetrical on one side. Symmetrical is the strongest one as trader can add to position on few points, while asymmetrical is harder to define entry. Symmetrical setup is where highs are progressing lower and lower over time and the lows are progressing slowly higher and higher forming a tightened structure towards left side, while asymmetrical one one side is the setup where highs are progressing lower over time but lows are also progressing lower, in such setup trader can only trade behaviour change on HH (higher high) bake as its too unpredictable if next low will actually be able to push price back upwards.

The stronger the momentum ahead of structure is the more likely it is that setup will work, momentum has priority focus.

There has to be consistency of behaviour in structure in order to trade it. If highs are all over the place once higher next time lower and then again higher, such structure will have potentially negative edge over 100 samples. Highs should be consistently lower and the more tightening that structure shows the better and the more potential of a squeeze move.

Bellow some FX examples:

A grade play

Bellow A grade example, after strong risk flows on dollar / equity side, many highs and lows inside structure, soft rounding towards end with higher lows and then strong pop. Setup on DAX German index. Setup also had solid volume on the impulse leg ahead, where the pullback leg is visible a lot more shallow than the initial bullish impulse leg ahead. Those kind of variables add to stack for A grade play.

Some more overall examples

Accumulation plays are especially great on crypto, as they provide more accuracy on trades than just buying dips or dollar averaging in, especially for hybrid investors / traders.

Volume is important factor to look on those plays, however it is not always of help. In fact in most cases it is not, however when it is it could be difference between B and A grade play. One of best volume micro patterns on accumulation breakout play is absorption of large offers at supply level, ahead of breakout. Large player will remove the key obstracle and then let the overall market to push the price into breakout move.

Bellow such example on Bitcoin:

Another example was on ALQA ticker when large offer was soaked right at the last third high and after the price shot higher. Did not save the screenshots of Level 2, only chart was saved. But the setup is similar to above on Bitcoin. This setup is also part of Type 1 short trap explained on article "Short trap".

Volume signal could be ahead of breakout on removing the offers at supply level (above example) or after the breakout on actual longs that fill into breakout (bellow example).

Those patterns work well in pumped alternative crypto coins (assets that are up 20% or more on a day), but the downside is that entry often has to be taken with bad fills on wide spreads if one is trying to catch the breakout. And filling on the bid ahead could be risky as often if there is no volume price can fade completely.

Trading Bitcoin solves that problem as it is more liquid and with use of leverage / margin can fill the potential profit gap as compared to alternative coins. But there is downside again which is less plays, opportunity cost.

If entry is missed on initial breakout, or if trader has not filled near the lows ahead of the break of accumulation structure, then best is to wait for dip back to breakout level to fill, because statistically this area is the most likely to reject / bounce as many traders will try to fill there with limit orders.

Bellow is example of trading US30 equity index with pullback accumulation legs, the blue rectangle charts are highlighted as part of larger macro play where US equities were under strong trend, strong fundamentals and larger risk off flows as part of macro play, along which M1 pullback accumulation pattern might be used for entry.

Crypto example bellow of accumulation pullback leg (after impulse) on BCHSV where large offer got removed that was sitting at the supply level, and after that there was quick influx of buy orders forming strong push. Strong impulsive leg on heavy volume, followed by consistent lower highs (but lows holding) and then microshelf after last high, then removal of large offer at supply and then pop upwards. All stages of structure should match for A grade play, additional to catalyst or other higher macro variables.

Another crypto example on Ontology coin with accumulation structure and a micro wedge ahead of breakout.Those micro setups right at supply often allow for good RR and tight risk in case if breakout is successful.

The focus is not on what the suggestion for entries are on those setups from my side, because as any pattern there are many ways to play it, the focus should be on variables that potentially identify the pattern. Reader should also have in mind that article uses only setups that were successful in delivering the expected move, by no means is that what will happen on every setup or even 3/4rds of them. Those just as much as any other patterns require proper risk management so that failed setups are cut as quickly as possible in order to have edge on play.

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