Momentum vs. Retracement Entries

The one-bar test

It is simple. A green 2u, then an inside bar, then the break up: the bar before the signal is the color of the trade — you are joining a move that is already paying its own direction. That is momentum. Now make the bar before the inside bar red, same break up: the trigger is identical, but the entry buys into a pullback, against the color of the last bar. That is retracement. Same signal, same trigger price, different trade.

The test classifies every signal the same way: a hammer or an inside bar after a green bar is a momentum long; after a red bar it is a retracement long. Mirror the colors for the shooter and the short side.

On gapping stocks — the labels cut across continuation and reversal

Continuation and reversal name the direction against the prior 2. Momentum and retracement name the color context. They do not line up automatically, and gapping stocks show it. On a gap up: 2u red, then a 1, then a 2u — that is a 2-1-2 continuation, but the entry is a retracement: the move has to retrace the red 2u first. And 2u red, 1, 2d on a gap up day is a 2-1-2 reversal that is pure momentum — the bar before the 1 already trades the color of the move.

Why the label matters

A momentum entry joins a side already in control. A retracement entry is one color early — it needs the change of color to prove it, so it is timed: let price run against the bias first, then enter on the flip. The red-to-green move at the open on the gap up buy is exactly that trade, with the stop tight under the low of day. Know which of the two you are in before the entry, because it sets what you expect from the very next bar.

Frequently asked

Is a continuation always momentum?

No. Continuation and reversal name the direction relative to the prior 2; momentum and retracement name the color of the bar before the signal. A 2-1-2 continuation off a red 2u is a retracement, and a 2-1-2 reversal off a red 2u is momentum. Check both labels, not one.

What does “2u red” mean?

The scenario number is about the break; the color is about the close. A 2u red broke the prior bar’s high — that makes it a 2u — but closed below its own open, which makes it red. The break and the color are separate facts, and this page is about using both.

Does the test apply to the 2-2 reversal?

Yes. Any signal with a bar before it can be read this way: the 2-2 reversal itself fires off the bar before it — a 2d-2u whose 2d closed green is already showing the buyers early, while a 2d-2u off a deep red 2d is a retracement that demands the color change first.

Related: Hammer · Shooter · Inside Bar · 2-2 Reversal · Actionable Signals · The Gap Up Buy
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