Updated: May 9
Accumulation and distribution periods in the market are a constant process of exchange. The difficulty is to find what variables might indicate that the market is in the accumulation phase or a distribution phase, it is all straightforward after the fact, but to find variables with the edge in live market it is a harder task.
The pullback is the word that will be used to define the accumulation section of price after the initial impulsive bullish move. The length of the impulsive move is more or less irrelevant, what matters the most is how strong really the move is (how many candles it took to develop, how strongly did volatility change and what volume was traded in the impulsive leg).
First to establish in pullback leg is context, which is the most important part of it. There is no real "pullback" without proper context because what is the price really pulling back against? Before the pullback, the market needs to establish a strong impulsive bullish leg. The strength of the actual impulsive market move has to be quicker and stronger than the pullback move, expressed in numbers of candles and the pips/points/cents distance it traveled within its leg. Therefore strong impulsive bull leg should be followed by a weaker / softer pullback leg in consolidated structure, for valid accumulation play.
Conceptual example (strong impulsive bull leg followed by softer pullback leg, simplified presentation from higher TF with fewer candles just for the sake of better view):
Below are few examples of volatility scale comparisons within the legs. The impulse leg should be at minimum 2X the volatility scale of the whole pullback leg. The pullback leg should logically fit how the 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): The trader should focus on spotting / finding a bullish impulsive move or uptrend (for accumulation play) or downtrend (for distribution) on the 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 a solid one-sided direction, with minimal pullbacks in between. This condition has to be met to filter out weaker plays and make the search process easier. The structure of the pullback leg should have progressive lower highs and tighten towards the right side of the 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 the live market, and the best way to do it is to practice on historical charts first as much as possible.
Hunting procedures in the live market: Flipping through assets in software such as MT4 or TC2000 is completely normal if the trader flips over 100 assets and does not find any decent play. This procedure is not meant to trade them but get enough search experience and watch potential accumulations of how they develop through the 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, an asset in play).
Positives: Present in every single market, widespread patterns.
Negatives: Not a high edge play (weak alpha), it needs tight SL (stop loss) management; otherwise, trading it will be unprofitable.
It could also be difficult for un-experienced traders to tell which highs and lows in the 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.
Structural composition (price action)
Below is the conceptual presentation of pullback leg after impulse move, followed by rotation and further upward thrust, in stages:
Once the first stage is established and a strong momentum leg is formed, a trader has context to start seeking for potential setup. There is no clue yet that price will form such a setup, but the first condition is there, which means there is some probability for it, without it, there is no point in waiting for such setup.
Once the first stage is done, the second stage, which is the pullback retrace leg, needs to start to develop, and there are many different ways this can happen. One is a 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 repurchased up until imbalance shifts to bullish side with higher high bake. Either way is a consideration.
The structure could either have symmetrical / even highs, or it could have lower highs. An essential aspect, the structure should not have higher highs in between because that reduces the liquidation cascade move once the supply/demand balance starts to shift.
The last stage is where price rotates above the first major high and starts to form another impulse leg higher, which is a replication of the initial impulse leg.
Below is an example of how highs should progressively develop in structure (left), and the right example is one that traders should avoid. This is simply due to a larger cascade move chance if the structure is set, as shown on the left example (due to un-liquidated stop losses and exit areas around supply).
Impulsive bull legs ahead of structure should represent market aggression on ask (traders removing liquidity of offers and pushing the price higher). The pullback 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 the accumulation period). Both of those counter processes can be best observed on the futures market with indicators that display only bid/ask aggression so that traders can note and spot the accumulation period from the absence of aggressive orders. There are plenty of indicators for Ninjatrader8 that show bid / ask market orders, generally, all of them are doing the same job. Or watching Level 2 / tape very closely does the same job as well. This is related to volume delta and is outlined with an explanation on other blog article.
Below is the conceptual presentation of impulsive heavy market order (ask) bullish leg on X equity ticker, M1 time frame (left) compared right to the M5 time frame (the impulsiveness of the 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). The example below is to note how strong should an impulsive move be relative to the minimum ticking distance on asset (bid-ask). This is just a "preferred" example for the sake of theoretical explanation, but in real live markets, obviously, there will be a lot more asymmetry to it.
A trader should observe the pullback structure if buyers pick up and accumulate on sell orders and especially observe how strong bull legs in the pullback structure are compared to bear legs. In general bullish legs should be stronger for A grade play.
Strong momentum ahead of the pullback leg will almost always be a precondition to a good setup. And if not that, then a heavy symmetry would be the next clue. On the weak impulsive move, the quality of play drops under A grade by default.
Picking good setups is all about future realistic expectations, thinking when one should expect a higher number of such setups? To answer that, one should think about when it's 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 a 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 these plays or equity assets that are up nice % on a day, as well as small-cap equities that are rigged by market makers and holding above 50% gain on a day. In FX, after central bank rates, the news is usually best to focus, especially on the surprising news that the market did not yet have 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 the first highest high on the left to lower and lower highs towards the right. Highs could progress in strong or softer progression (being more flat-even or having a 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 the last high is breached, the 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 the distance of the last leg (after breaching the previous high initially), it will likely fail to push forward, this is based on a huge amount of gathered data I did for this setup. The price will move straight up higher after breaching the last major lower high on best winning plays.
Profit target should be the 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 also be anywhere elsewhere if Level 2 gives a soak or strong bid to lean on.
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 preferred is more than that. This is a must, otherwise one cannot really tell if the 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 traders 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. The lows are progressing slowly higher and higher, forming a tightened structure towards the left side, while asymmetrical one side is the setup where highs are progressing lower over time. Still, lows are also progressing lower; in such setup, traders can only trade behavior change on HH (higher high) bake as it's too unpredictable if the next low will actually push the price back upwards.
The stronger the momentum ahead of structure is, the more likely it will work,; momentum has priority.
There has to be consistency of behavior 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 high 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. That kind of variable adds 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 an 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 a difference between B and A grade play. One of the best volume micro patterns on accumulation breakout play is the absorption of large offers at the supply level, ahead of breakout. The large player will remove the key obstacle and then let the overall market push the price into a breakout move.
Bellow such example on Bitcoin:
Another example was on the ALQA ticker when the large offer was soaked right at last third high and after the price shot higher. I did not save the screenshots of Level 2, only the chart was saved. But the setup is similar to the above on Bitcoin. This setup is also part of Type 1 short trap explained in the article "Short trap."
Volume signal could be ahead of breakout on removing the offers at the 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, the price can fade completely.
Trading Bitcoin solves that problem as it is more liquid and, with leverage/margin, can fill the potential profit gap compared to alternative coins. But there is downside again, which is fewer 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/bounces many traders will try to fill there with limit orders.
BBelowis example of trading US30 equity index with pullback accumulation legs, the blue rectangle charts are highlighted as part of the 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 below of accumulation pullback leg (after impulse) on BCHSV where the large offer was removed was sitting at the supply level. After that, there was a quick influx of buy orders forming a strong push. Strong impulsive leg on heavy volume, followed by consistent lower highs (but lows holding) and then micro shelf after last high, then removing the 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 if the breakout is successful.
The focus is not on what the suggestion for entries is on those setups from my side because, as with 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 the 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 to have the edge on the play.