Limit entry or market entry on a pullback

[Fairman]

Limit entry or market entry on a pullback

A pullback setup offers two ways in. Place a limit order at the expected pullback level and wait. Or watch the pullback develop and enter at market when confirmation appears.

The limit order has advantages. It fills at a precise price, with positive slippage possible. It saves the spread, since a buy limit is filled at the bid-side level instead of crossing to the ask. It also removes the need for quick reflexes.

The disadvantage is adverse selection. Limits fill when price drops into them, including when price keeps falling. The fills that occur are overrepresented by moves that didn't bounce. Those that bounce early leave the limit unfilled.

The market order enters after confirmation, at a worse price but with more information. It misses some of the best entries, but avoids some of the worst.

A comparison on historical data answers the question for a specific strategy. Measure the average result for limit entries, including the unfilled trades as zeros, against market entries.

Results differ by pair and condition. In ranging markets, limits tend to do well. In trending ones, they tend to be run over.

There's a hybrid that some traders like: split the intended size in two, placing half as a limit at the expected pullback level and keeping the other half to enter at market on confirmation. If price dips and bounces cleanly, the limit portion fills at a good price and the market portion adds after confirmation. If price runs without pulling back, only the market portion is taken, and if price keeps falling through the limit, the limit portion is stopped with a smaller position than a full-size limit would have carried.

The hybrid doesn't beat both pure approaches in every condition, but it often smooths the equity curve, and it addresses the specific weakness of each option.

Over the last few hundred trades, which entry type has shown better results?

[Amanhasnoname]

I tested exactly this on my EURUSD pullback setup about a year ago, and the adverse selection point is very real. On paper the limit entries looked better because the average entry price was nicer, but once I counted the unfilled ones and looked at what happened after the fills, the market entries came out slightly ahead in trending sessions.

In quiet ranges it flipped completely. During the Asian session and the dead hours before New York, the limits were clearly better because price usually just touched the level and drifted back. So now I decide based on the session rather than having one rule for everything, which sounds complicated but really just means two lines in my plan.

I tried the split version you describe for a couple of months as well. It did smooth things out, but my problem was execution. Managing two pieces of the same trade made me fiddle more, and I started moving the limit around when price got close. If someone can handle it mechanically, I can see why it works well.