Pullback Trading Strategy

Pullback Trading Strategy

In this article, I will discuss the Pullback Trading Strategy in detail. Please read our previous article about Trading with a Sideways Price Action Area. We will also discuss the following pullback trading strategy concepts in detail.

1. What are the Pullbacks and Psychology behind a Pullback trading strategy?
2. Benefits of Pullback Trading
3. Characteristics of Pullback
4. Pullback Trading Types
5. Where Does Pullback End?
6. Conservative vs. Aggressive Entry

What are Pullbacks and the Psychology Behind Pullbacks?

A pullback is a price movement that moves against the trend. It is temporary before it resumes back into the main market direction. Pullbacks are sometimes referred to as price Correction or retracement. A pullback occurs when the price moves at least one bar against the opposite direction of the trend.

1. The hope of comparison is to find the top or bottom of weakness in price move by the novice.
2. If the pullback is sluggish, contra traders will lose hope, while bullish traders will regain confidence.
3. If the pullback down is strong and signals bearish conviction, the bar will get more aggressive, and the bulls will start to doubt their position.

Benefits of Pullback Trading Strategy

There are several benefits of the Pullback Trading Strategy. Some of them are as follows:

1. Trading pullback lets you have a tighter stop loss as your trade location is good, and this gives you a better risk to reward
2. From a psychological standpoint, it’s easier to pull the trigger as you’re buying high and selling low

Characteristics

CHARACTERISTICS of WEAK PULLBACK

1. Correction (depth of pullback) must be small and without strong momentum candlestick
2. Volume decreases / low volume correction
3. A great mix of red and green candles with a light volume
4. Closes towards the middle with wicks
5. How pullback came (should not come after consolidation)

Week pullback leads to continuous an existing trend

CHARACTERISTICS of STRONG PULLBACK (leads to TR/REVERSAL) Trading

In a bull trend, the strong pullback key features are as follows:

1. First is a series of consecutive bearish bars(LH/LL)
2. Second is the presence of a strong bearish bar( trend bar)
3. The third VOLUME DOES NOT REDUCE on a pullback
4. Fourth Depth of pullback (deep)
5. Fifth, How does Pullback come (after consolidation)
6. When pullback fails to bounce back quickly

Hence, a weak pullback lacks all these features.

Strong pullback leads to a TRADING RANGE OR reversal of trend or a serious attempt to reverse the trend

PULLBACK Trading Strategy TYPES

These corrective moves are either time or price corrections, but they denote a change in the order flow and participation depending upon the types of trend. There are TWO TYPES of Pullback Trading Strategy. They are as follows:

1. TIME CORRECTION
2. PRICE CORRECTION

A strong trend: (Time Correction)

In strong trending markets, you’ll have pullbacks that usually stock moves in a horizontal, low volatility trendless manner. Because the pullback is shallow, it isn’t easy to time your entry on a pullback. Instead, you can trade the breakout or find an entry on the lower timeframe.

Healthy trend: (PRICE CORRECTION)

A healthy trend is between a strong and a weak trend. Expect a pullback towards the SR level.

Weak trend (TRENDING RANGE TYPE):

In weak trending markets, you’ll have steeper pullbacks that usually retrace toward major Support and Resistance

TIME CORRECTION

TIME CORRECTION (Stock to digest the directional move is through a time correction). In time correction, the stock moves in a horizontal, low volatility trendless manner. Generally, a strong trend has time correction.

A strong trend: (Time Correction)

In strong trending markets, you’ll have pullbacks that usually stock moves in a horizontal, low volatility trendless manner. Because the pullback is shallow, it isn’t easy to time your entry on a pullback. Instead, you can trade the breakout or find an entry on the lower timeframe.

What is happening here is as follows?

As the trend continues, it gets far from the stop loss point; retailers take profit to reduce risk, and the market pulls back and goes sideways. Once bulls are confident that the bears will fail to reverse the trend, bulls buy again with a tighter stop loss.

The diagram above shows a time correction pullback example.

PRICE CORRECTION

PRICE CORRECTION, CORRECT as price moves in the opposite direction of the primary trend. This correction occurs by price and moves towards the SR level.

Healthy trend: (PRICE CORRECTION)

A healthy trend is between a strong and a weak trend. Expect a pullback toward the SR level.

The above diagram shows that the bears are usually trying to show their dominance but not realizing that the bulls are still strong. The bulls usually come back into the market just before the bears manage to build confidence.

Complex Pullbacks

Complex pullbacks happen when the price steps into a consolidating phase in the form of any pattern. It then remains consolidated for a while before it resumes the trend. No one really knows how long it remains consolidated before it moves again. Generally forming a continuous pattern like

1. Rising / Falling Wedge Pullback
2. Rising / Falling Flag Pullback
3. Pennants Pullback
4. Widening Wedge Pullback

Where does the pullback end?

Here are some of the guidelines to find

1. Towards previous resistance turned support

2. Towards previous support turned resistance.

3. Towards dynamic support.

4. Towards a dynamic resistance.

5. Towards a Fibonacci retracement

Now you have an idea of where the price could potentially be retraced.

Conservative vs. Aggressive Entry at Technical Test Point or End of the Pullback

Should one insist on playing a reversal without waiting for build-up, firing into a technical test (where pullback ends) is certainly superior to firing into a void. But there is still a large degree of aggression and risk involved with respect to the stop-loss point. Let me explain.

Pullback D-E represents a test in the level of B, which was a function of the earlier sideways activity within a bull trend

It can safely be stated that level B plays a crucial role in this chart:

1. Resistance turned into support
2. It provided a level for a technical test in a Fibonacci 50/61.8 percent correction;
3. It offered a platform for bulls and bears to fight it out to determine the lows of the correction,

By waiting for consolidation at support, it is inevitable to miss a turn occasionally. In fact, it is quite a frequent occurrence. But it will also save us from many quick shakes.

It is important to note that the higher entry above F does not necessarily compare unfavorably to the more economical entry at E. First, the consolidation below F confirms the likelihood of the reversal, which is already a plus. However, there is another issue to consider that will affect the clinical odds of both wagers. The levels for protection and target in relation to the level of entry.

The above chart has a small variation.

The above diagram demonstrates what exactly it is that we aim to avoid when waiting for consolidation. This time, the pullback D-E reversal played itself out a little differently. Technically seen, the level of B once again presented itself as the most likely candidate for a possible turnaround (a 50/60 percent retracement in an area of former support, now resistance), but an immediate short at point e would have put an aggressive bull in serious trouble before the actual turn set in.

Take note of the fact that in this situation, prices are once again put in a technical test before reversing. Still, instead of using a former level of support to bounce away from (B), the market opted for a former level of resistance to turning around if matches (C). Both E and F are valid technical tests and are equally common in occurrence. since we have no way of knowing beforehand which level the market will pick in any one situation, the idea is to remain on the sidelines until more clarity comes along. BUT Not always will the market offer us this extra information, but it will do so often enough to consider patience a vital ingredient in operating tactics.

As to the conservative long, an entry above the level of G and a tight stop below the level of F will certainly have suited many BULLS just fine.

How to enter your trades on a pullback

There are many ways to enter your trades via a pullback. Here are some entry techniques you can us

1. Reversal candlestick patterns break out
2. Continuous pattern TL breakout

Reversal patterns

Reversal patterns represent a rejection of higher/lower prices, which are useful for entry triggers. Some of these patterns can be the pin bar, engulfing pattern, and outside bar

Continuous pattern TL break

PULLBACK SETUP FOR DAY TRADING

Trade setup cannot have the following:

Already traded to target on a bigger time frame after the initial morning move

Like all trading strategies, a pullback strategy requires practice, patience, and strict risk management. Also, it’s important to note that sometimes, what appears to be a pullback could actually be the start of a trend reversal. Hence, traders should be prepared for scenarios where the trend does not resume as expected.