Pullback trading is a temporary pause or decline in the price of a stock or commodity that occurs during a sustained increase. Read more about pullback trading below!
What is Pullback?
A pullback is a temporary decline in an asset's long-term uptrend. Pullbacks are typically down around 5% to 10% and are short-term in nature.
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Pullback Trading Is
Pullback trading is a pause or moderate decline in the price of a stock or commodity that occurs within a sustained uptrend. A pullback is similar to a retracement or consolidation. The phrase “pullback” refers to a price decline that lasts for a short period of time, say, several consecutive sessions, before the uptrend resumes. After a security experiences a major upward price movement, a pullback is usually viewed as a buying opportunity. For example, after a strong earnings report, a stock may see a large spike before reversing as traders with existing positions take profits. Positive earnings, on the other hand, are a fundamental signal that the stock will continue to rise. Before resuming its uptrend, most pullbacks see the security’s price move to a technical support level, such as a moving average or pivot point. Traders should keep an eye on these critical support levels, as a break below them could suggest a reversal rather than a pullback.
Difference Between Pullback and Retracement
A retracement is very similar to a “pullback.” It refers to a small pullback or, more broadly, a temporary change in a crypto trend. Therefore, it is also a retracement if the crypto price rises while in an overall downtrend. Often the two terms are used interchangeably.
How Pullback Trading Works Is
Let’s discuss how pullback trading works by explaining how pullbacks are used in pullback trading, a day trading strategy. Pullback trading begins with an uptrend. The investor identifies a stock that is trending upward. The longer an asset is trending upward, the more likely the existing trend is to continue. The investor then determines an entry point, which is where pullbacks come in. The investor can plan to buy when the stock pulls back a certain percentage, taking advantage of the discount and then riding the price trend higher. The key is figuring out whether the pullback is a temporary pullback, or whether it is a longer-lasting correction or even the beginning of a longer-term downtrend. One indicator of a pullback might be lower trading volume. With a reversal, you tend to see higher trading volume on the downtrend. Investors can use several strategies to help them try to capitalize on pullbacks:
- Pay attention to the basics : Studying income statements can provide good information about whether a company is experiencing problems.
- Wait and see how low the pullback goes : If a pullback breaks support (often measured by a pre-established trendline), it may be more than just a pullback. It could be a longer-lasting reversal.
- Check stock volume: If volume increases during a decline, it could signal that sellers are taking over in a long-term sense.
Bullish: Definition, Pattern, Flag, and Trend
Pullback Trading Strategy
Here are 6 strategies you can use when doing pullback trading:
1. Trend line
It should be fairly simple to determine the trend direction. The swing high and swing low structure is the simplest way to identify a trend. A sequence of higher highs followed by a series of higher lows is an uptrend. A sequence of lower lows and lower highs is a downtrend. The downside is that trendlines often take longer to validate. Trendlines require 3 points of contact to validate. You can always connect 2 random points, but it is only when you get the third that you truly see a trendline. Therefore, trendline pullbacks can only be traded on the third, fourth or fifth point of contact. Trendlines can work well in addition to other pullback methods, but as a standalone method, traders may miss out on many opportunities when trendline validation takes a long time.
2. Moving Average
Moving averages are without a doubt one of the most used tools in technical analysis, and they can be used in a variety of ways. You can also use them to trade pullbacks. A 20, 50, or even a 100-period moving average can be used. It really doesn’t matter, and it all depends on whether you are a short-term or long-term trader. Shorter moving averages are used by short-term traders to get quicker indications. Shorter moving averages are, of course, more prone to noise and false signals. Longer-term moving averages, on the other hand, move slower, are less prone to noise, but may miss short-term trading opportunities. For your own trading, you should weigh the pros and cons. From the weekly chart of Suzlon Energy Ltd above, we can see how the 50 EMA acts as support and traders can enter the stock if they miss a buy opportunity on a pullback.
3. Fibonacci
In the financial markets, Fibonacci levels work very well for pullback traders as well. You do this by waiting for a new trend to emerge, then drawing your Fibonacci AB tool from the origin of the trend to the end of the trend wave. The pullback can then be done using the Fibonacci retracement C-point. The new trend pulled back quite precisely to the 50 0R 61 percent Fibonacci retracement before resuming the uptrend, as shown in the chart below. Fibonacci retracements can be very successful when combined with moving averages, and when a Fibonacci retracement coincides with a moving average, it can be a high probability pullback area.
4. Breakout
Prices do not always move in a straight line, and price action in any financial market is often characterized by price waves. In addition, bullish and bearish trend waves alternate in the market. The dominant trend wave moves higher during an uptrend, as shown in the chart below. A correction wave is a movement in the opposite direction of the current trend. Traders who trade pullbacks look for correction stages and enter trades during them. The concept is that you should wait for the price to “pull back” during a trend to get a better entry price. When the market is going up, and you believe it will continue to grow, you want to enter the trade at the lowest possible price. Breakout pullbacks are very common, and probably most traders use this price action pattern in their trading. Pullback breakouts usually occur at market turning points, when the price breaks out of a consolidation pattern. The W-edge, triangle, or rectangle are the most popular consolidation patterns.
5. Horizontal Steps
Stepping behavior can be seen in all financial markets during some phases of a trend. It is an inherent price rhythm, and it indicates the ebb and flow of market activity. The stepping pattern is often seen during a sustained trend phase. This pullback strategy complements the breakout retracement outlined earlier. Near the market turning point, a breakout pullback occurs. However, if a trader misses the initial entry opportunity, horizontal steps can help him find alternative entry opportunities as the trade progresses. In addition, traders may use the stepping pattern to draw a stop loss behind the trend in a safer manner. The trader in this example waits until price completes one step before drawing a stop loss behind the previous retracement area. The stop loss is then protected and no longer vulnerable.
Benefits of Pullback Trading Strategy
There are several benefits of Pullback Trading Strategy. Some of them are as follows:
- Trading drawdowns allow you to have tighter stop losses because your trade location is good and this gives you a better risk to reward ratio.
- From a psychological standpoint, it's easier to pull the trigger when you buy high and sell low.
Using Pullback Trading Strategy in GICTrade
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