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Pullback continuation and range-day fades

Lesson 15 · about 10 min

The last two setups are the ones you take after 10:30, when Module 5's day-type read is in. Pullback continuation is the trend-day trade. Range fades are the range-day trade. The rule that matters more than either specification is that you take one or the other, never both, because the day type has already told you which side of the market has the follow-through.

Pullback continuation on a trend day

The idea. On a trend day the market moves in one direction with shallow pullbacks that never reach the previous swing. Each pullback is an entry, because the participants who are late keep buying dips and the ones who are short keep covering rallies. The trade is not to catch the move but to join it at the point of least risk.

Day type it needs: a confirmed trend day. The tells (Module 5): the initial balance extended on one side only, price on the same side of VWAP for the whole first hour, VWAP sloping, breadth one-sided.

Trigger: a pullback of two to five 5-minute bars against the trend that does not close below the prior swing low (for an uptrend), followed by a 5-minute bar that closes above the prior bar's high. Entry on that close. The pullback should retrace between a third and two-thirds of the previous leg; shallower is a flag that has not finished, deeper is a possible reversal.

Stop: under the pullback low. On a strong trend day the pullback low is typically above VWAP; if the pullback low is below VWAP, the trend is weakening and the stop goes under VWAP instead, which is usually too wide; skip.

Target: a measured move: the length of the previous leg, projected from the pullback low, for half. The high of the day (a new one) for the rest, trailed under each subsequent 5-minute higher low.

Invalidation: a 5-minute close below the pullback low before the entry bar's high is exceeded. Exit; the pullback became a reversal.

  Trend day pullback, 5-minute bars

                                                        __/  target 2: trail
                                                   ___/
                                              ____/ ^ measured move = leg A
                          leg A    \    _____/
                     ____/          \__/  ^ entry: close > prior high
                ____/               ^ pullback low = stop
           ____/
      ____/
  ---/---------------------------------------- VWAP (rising)
  __/
   10:30  10:45  11:00  11:15  11:30  11:45  12:00

The R:R table. Entry 5,020 in ES, stop 5,012 (1R = 8 points), measured move target 5,036 (2R), trailing exit averaging 5,044 (3R).

Outcome Result
Invalidation −0.5R
Full stop −1R
Half at 2R, rest breakeven +1R
Half at 2R, half at 3R +2.5R

Distribution on confirmed trend days: 20 invalidations, 20 stops, 30 partials, 30 winners.

Expectancy = −0.10 − 0.20 + 0.30 + 0.75 = +0.75R

That is the highest number in the module and it comes with the biggest caveat: trend days are roughly 20% to 25% of sessions. Take the same trade on a range day and the pullback becomes a reversal about 60% of the time, expectancy goes negative, and you have paid to learn what the day-type read would have told you for free.

Range-day fades at the extremes

The idea. On a range day (about half of all sessions) the initial balance holds, price rotates from one edge to the other, and every breakout attempt fails. The trade is to sell the top of the range and buy the bottom, targeting the middle.

Day type it needs: a confirmed range day: both initial balance extremes tested and held, price crossing VWAP repeatedly, breadth mixed, VWAP flat.

Trigger: price reaches within a few ticks of the initial balance high (for a short) and prints a 2-minute bar with a high above the prior high and a close below it: a rejection bar. Entry on the close of that bar. The mirror at the low.

Stop: beyond the initial balance extreme by one-third of an average 5-minute bar. This is intentionally tight; if the range breaks, you want to be out with a small loss and possibly reversed into the breakout.

Target: VWAP for half (usually near the range midpoint), the opposite extreme for the rest. On a range day the opposite extreme is reached less often than VWAP, so the second half is a smaller bet.

Invalidation: a 2-minute close beyond the extreme. Same as the stop, effectively; this setup has no earlier exit because the rejection bar is the whole thesis.

  Range-day fade, 2-minute bars

  IB high 5,030 -----/\--------------/\-----------  stop: 5,032
                    /  \   entry    /  \   entry
                   /    \  5,028   /    \  5,028
                  /      \        /      \
  ---------------/--------\------/--------\---------- VWAP 5,015 = target 1
                /          \    /          \
               /            \  /            \
  IB low 5,000 ---------------\/--------------\------  target 2
                          entry 5,002 (long)
      10:30   10:50   11:10   11:30   11:50   12:10

The R:R table. Short at 5,028, stop 5,032 (1R = 4 points), target 1 VWAP at 5,015 (3.25R), target 2 at 5,002 (6.5R).

Outcome Result
Full stop −1R
Half at 3.25R, rest breakeven +1.6R
Half at 3.25R, half at 6.5R +4.9R

Distribution on confirmed range days: 55 stops, 35 partials, 10 winners.

Expectancy = −0.55 + 0.56 + 0.49 = +0.50R

A 45% win rate with 3R first targets. The danger is different from the trend setup: the fade's loss is small but it is taken often, and the day it stops working is the day the range breaks into a trend, at which point four consecutive fades at −1R each equal −4R. The consecutive-loss rule in Module 7 exists for exactly this.

Key idea: After 10:30 the day type is a fact, not a guess. Pullback continuation is the only trade on a trend day; range fades are the only trade on a range day. Taking both on the same day means you have not read the day.

Cost note

Range fades have small stops in points, so cost in R is larger. A 4-point ES stop is $200; cost of $22 is 0.11R. On MES the same trade risks $20 with cost of $3: 0.15R. Fades are the setup where a tighter product (ES over MES, large cap over small) pays back most.

Try it: Take twenty sessions in replay. Classify each by 10:30 as trend or range using the tells in the next module. Then apply only the matching setup for the rest of the session. Record the R. Then, for the same twenty sessions, apply the wrong setup. The gap between the two numbers is the value of Module 5.

Recap

  • Pullback continuation: on confirmed trend days, buy the first higher low after a one-third to two-thirds retrace; stop under the pullback low; target a measured move and trail.
  • Range fades: on confirmed range days, sell rejection bars at the initial balance high and buy them at the low; stop just beyond the extreme; target VWAP first.
  • Trend setups run about +0.75R per trade but only on the 20 to 25% of days that trend; on range days they lose.
  • Fades run about +0.5R with a 45% win rate and small stops, and a single range break can produce several losses in a row.
  • Never take both on the same day; the 10:30 read decides which is live.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Intraday price swinging around VWAPA price line for one trading day weaving above and below a smoother VWAP line, with a band drawn one standard deviation either side of it.INTRADAY PRICE AND VWAPprice9:3012:4516:00+1 SD bandVWAP−1 SD bandIllustrative session. VWAP starts fresh at the open and firms up as the day fills in.
VWAP and its standard-deviation bands. VWAP is the day's average price weighted by how much volume traded at each price, so it shows where the bulk of the day's business was done. The bands sit one standard deviation either side, and price here swings between them all session.
A range beside a trendOne chart swinging between a flat floor and ceiling, another stepping upwards inside a pair of sloping lines.Range-boundresistancesupportprice bounces between two levelsTrendingthe trend channelhigher highs and higher lowsA range has two flat edges; a trend has two sloping ones.
Range versus trend. On the left price keeps bouncing between the same floor and ceiling, which is a range. On the right each high and each low is higher than the last, inside a pair of sloping lines called a channel.
Risk and reward on one tradeA price scale showing an entry with a stop two points below and a target six points above, so the reward band is three times the risk band.PRICETARGET 106.00ENTRY 100.00STOP 98.00REWARDRISK6.00 pointsthree times the risk2.00 pointsthe most you loserisk : reward = 1 : 3
Risk and reward on one trade. One trade on a price scale: the entry sits 2.00 points above the stop and 6.00 points below the target, so the shaded reward band is three times the risk band. The ratio compares what is lost if the stop is hit with what is gained if the target is reached.

Finished this module? Take the module quiz.