• : January 23, 2021
  • : Prashant Shah


Pullback & Disparity

Broadly, there are three types of patterns that we trade: Breakout, reversal and pullback.


There are many possibilities and price patterns to find pullback trading opportunities. Check below image. It is a current chart of BHARATFORG on daily 0.25% x 3 box-value.


Point A is a strong breakout pattern. Point B is a correction. When stock is in uptrend and there is a bull market, we can look for buying the stock in correction. It can provide us better risk-reward opportunity.

But when stock is correcting, we don’t know the length of correction. We need some confirmation to buying
on this pullback. Price turning to column of ‘X’ could be a confirmation.

Another possibility is price correcting till moving average. See point C in below image of same chart.



In strong trend, stocks have tendency to revert to the moving average. In Noiseless charts, there are no consolidation bars. So, bounce back must happen in price. There is not time correction or consolidation bars. Hence, they provide better trading opportunities.

How can we define condition for stocks trading near its moving average?

Distance between price and moving average is known as Disparity index. Steve Nison explained this concept in his book Beyond Candlesticks.



We can use this indicator to find the patterns trading near moving average. Disparity index will be 0 when price is trading exactly at moving average.

Price trading exactly near moving average is theoretical. So, looking for stocks where Disparity index is trading at zero will not be very useful. We will need to define a range that we will tolerate.

Some percentage above moving average and below moving average price is a range we need to define.



For example, 0.50% above moving average and 0.50% below moving average is a range we will tolerate.
Let’s create a scanner in TradePoint for this.
  • Go to Backtesting -> System builder -> Indicator
  • Select any charting method. For example, P&F chart.
  • You will find conditions Disparity index above value and Disparity index below value.


 
  • First condition is, disparity index below value 0.50%
  • Second condition is, disparity index above value -0.50%.
  • Expression should be: 1 and 2.



You can use this scanner to find stocks trading near moving average. It is applicable on any charting method.

Let’s think more..

Can we look for same scanner followed by column of X? Yes, above conditions will be on column 1 in that case.

More..

Can we use this scanner to find stocks trading near MAST clouds in Renko chart?

MAST indicator clouds are combination of Moving average and Super trend.

Bullish strategy:

  • Disparity index above -1% at 0
  • Disparity index below 1% at 0
  • Price trading above Super trend at 0
  • Expression: 1 and 2 and 3
This strategy will help us finding stocks trading near of within MAST clouds in uptrend.

Bearish strategy:

  • Disparity index above -1% at 0
  • Disparity index below 1% at 0
  • Price trading below Super trend at 0
  • Expression: 1 and 2 and 3
Below are from charts that appear in scanner if I run that today.









The concept is applicable on any charting method. We can analyse chart and look for confirmation. While seeking confirmation, look for stocks in strong trend. Pullback opportunities should be looked in established trends. Ignore stocks trading in a range bound trend.