Pullback Trading and Pullback Strategy

What is Pullback Trading and Pullback Strategy ?

Pullback trading and Pullback strategy are the most profitable techniques in trading. They are the best ways in trading if it is done in accordance with a rule. A pullback is a situation in the financial markets, wherever the price of a security or a commodity pulls back to the contrary direction of the general trend. For instance if prices have been rising a pull back is when the price decreases for a period of time before it increases again. The same idea applies in the opposite way if the prices that you are aware of have been on a declining trend. A pullback is an opposite price movement to the current trend. But it is temporary before it returns to the original main market direction. These are also described as a price correction or retracement. A pullback is a period when the price reverses by at least one bar than the prior trend.

Market retracements are normal and can be caused by things like people taking their money, changes in people’s attitude towards the market or temporary availability of buyers relative to sellers. Usually pullback is viewed as an opportunity to make the trade at better prices while anticipating that the old trend will repeat itself.

So, if one has to be very effective it is important to use pullback strategy when trading and that requires analyzing things critically, managing risks effectively and keeping abreast with market developments. Retracement in technical analysis offer chances to trade after a lot move of a trend but making profit out of such move may not be easy. At times, during a pullback, what you invested in continues to trend in the opposite direction, resulting in a loss. Sometimes it might increase considerably, at other times it might not, and this means you are left out of other trades.

This article will attempt to discuss as to what specific skill is necessary for making consistent markup profits with pullback trades, how one should manage profits properly, and how one should learn to accept his/her losses with minimal risk involved.

• The hope of comparison is to find the top or bottom of weakness in price move by the novice.
• If the pullback is weak then contra trading becomes a hope less behavior while the bullish trade becomes a confident one.
• If some kind of pullback down is strong enough to indicate bearish sentiment, then the bar will become even more intense and the bulls start to waver.

Advantages of Pullback Trading Strategy

But first, it is important to understand the various advantages that Pullback Trading Strategy has. Some of them are as follows:

• Trading pullback allows you to be very close to the market as your trade location is good and this makes you have a tighter stop loss while you aim at having a better risk to reward.
• Psychologically, it is easier to understand it as pull the trigger, as you are buying when the price is high, and selling when the price is low.

Characteristics of weak Pullback

• Correction (depth of pullback) has to be minor and with a weak impulsive force candlestick.
• Volume reduces / low volume increase
• A combination of red and green candles with moderate light volume
• This cone was closing towards the middle with wicks.
• How consolidation came (should not be followed by pullback)

Characteristics of strong Pullback

• The first one is a case of consecutive bullish bars LH/LL (Lower high/Lower low).
• Second is the presence of a powerful bearish bar (trend bar).
• The third VOLUME DOES NOT REDUCE in case of a pullback
• Fourth Depth of pullback (deep)
• Fifth, How does Pullback come (after consolidation)? When pullback fails to rebound in the short-term period

Thus, a weak pullback does not possess these features at all.

How actually pullback works in Trading ?

Pullback is similar to a brief halt in the primary direction of price movement of certain goods and commodities in the operation of financial markets. Unlike those prices which might move in a straight up or down manner, they might take a little breather and shift a little sideways before getting back to the way they were going. Pullback trading is all about making these trades when a temporary reversal occurs. For instance if prices have been high, and a pullback is when they are low for some time before they may go high again. In order to make a pullback trading work you have to study things properly, minimize losses, and know what is going on in the market.

Key point to remember in Pullback strategy/trading.

• Identifying the Trend:
  • Know the trend of the currency pair in the foreign exchange market by referring to price bars, lines, or other graphics, together with averages, and indicators. This helps you know if it’s going up or down.
• Criteria for Pullback:
  • Determine when the trend is halting or slowing. This could be a certain percentage it goes back, hits a big support or resistance level, or when the change in a signal is identified.
• Confirmation Signs:
  • Invest amount while focusing on the indicators that would heinous supportive that the “Bearish” pull back of price is over, and the price will assume the previous “Bullish” position again.
• Entry Strategy:
  • The moment you notice these signals or seeing confirmation that the stock is in a pull back, then you can consider placing your trades in the same direction as the major trend. If it is rising you can try to look for an opportunity to get a currency pair and if it is falling you would love to look for an opportunity to sell or sell short the currency pairing.

Do’s and Don’ts for Pullback Strategy in Trading

Adhering to the above mentioned dos and don’ts may assist in improving your overall chances of scoring high a pullback trading strategy and at the same time outline the possible dangers you should avoid.

Do’s to become a profitable trader

• Find out the Important Support and Resistance Zones.
• Limit entries on Pullbacks to technical levels where you believe a reward will surface hence, employ indicators such as the Fibonacci retracement level, moving averages or trends among others to identify where a pullback may be most probable.
• Wait for Confirmation Signals: It is also recommended to use also candle formation signals such as RSI or MACD to solidify the pullback conclusion to determine the stabilization of the price before entering into the trap.
• Use Proper Risk Management : The stop loss would help prevent further losses if the pullback is in the opposite direction of a trader’s holding. To limit your risk exposure you should only risk a small percentage of your total capital for every trade that you make.
• Trade with the Trend : Always you go with the flow of trend. There is also a saying ” trend is your friend”, if you are following the market trend then it will increase your chances of getting good trade and make you profitable.
• Track Volume : Expect higher volume on the pullback to indicate paired interest and possibly reversal of the trend or its strong hold.
• Analyze Time Frames : Have higher time frame to verify the trends and entry signals. It is possible that the pullback on a time frame shorter than that specified is compatible with some larger pattern. Higher time frame is always better for double confirmation.

Dont’s to become a profitable trader

• Avoid Chasing the Price : When you practice trading, avoid attaining an entry point before waiting for the pullback to be complete because this will just render you with poor entry points and with certain risks. This is actually an indication that one should not rely on one index as the final word.It is best to utilize several measures in an effort to increase the assurance that a pullback and the strength of a trend is present.
• Don’t Overleverage : Using high leverages for trading may double or triple the losses of the traders during moments of retracement. Do not use large volumes of money. The wise use of various analytical approaches stipulates not to ignore the general state of the market. They also advise against using an adverse market trend as a trading strategy. Strong pullback setups can also go wrong even if a trader applies them correctly due to the position of an upward/sideways channel being in the wrong direction.
• Avoid Emotional Trading : Do not allow the feeling of being scared or the feeling of a buzz drive you. Just stick to your trading plan and only go for a trade when you meet your conditions.
• Do Not Trade During sidewise market and news announcement: Do not place a pullback trade during the release of economic reports or during major events because price fluctuations prevail. During new, technical analysis won’t work most of the time.