top braking news about Stock Market

Pullback trading strategy

July 2, 2020

There are many various strategies designed to trade the pullback. The pullback trading strategy is aimed to trade in the direction of a trend. You can gain profit from trading pullbacks on different time frames. Before we describe the pullback trading strategy and its steps in detail, let us provide the definition of pullback and the main difference between a pullback and consolidation. In addition, we will review the advantages and disadvantages of trading pullbacks. 

What is Pullback

The market experiences ups and downs, which result in price fluctuations. The pullback is an occurrence when the price of stock or commodities drops or pauses in its movement for a short time while the general tendency remains unchanged. So, after the short period of pullback, the uptrend starts again. To sum up, the pullback is a short pause or a slight decrease in the price of the stock.

This term is similar to consolidation and retracement and sometimes can be used as a substitution of the mentioned words. However, the difference between consolidation and pullback is the duration of time – a pullback usually occurs within a few consecutive sessions. On the opposite, consolidation takes place if the pause before the uptrend takes a longer time. 

Pullbacks are good opportunities for traders and may serve as a perfect point of the market entry. Traders wait for the pullback in the price and then enter the market while the price is at the lowest point possible. For instance, the shares of the company increase by up to 20%.

The next day the stock faces the pullback. Due to the favorable earnings reports, the traders and investors will be attracted to the stock, which results in the uptrend in the nearest future. 

Advantages of Pullbacks

Price 

The main advantage of the pullback is the ability to buy the stock at a low price and then sell it at a high price. If you trade pullbacks during the uptrend, the price will be lower. If you sell the stock within the downtrend, the price will be higher.

Predictability

The other benefit is the opportunity to predict the state of the market in advance when you know the pullback pattern. The investor does not need to wait when the price movement is confirmed, he or she is able to make a trade at once.

Unique Strategy

Pullback offers the trader the chance to define his or her own trading strategy that will differ from the approaches chosen by the other traders. For instance, one of the popular approaches is a moving average crossover strategy that is used by many traders. If you have your own pullback pattern, then you are able to find the points missed by the other investors.

Disadvantages of Pullbacks

The Difficulties in Defining a Pattern

The main trader’s problem when relying on a pullback pattern is subjectivity. Sometimes it is difficult to define which pattern is occurring within a trend and, accordingly, the most suitable time for trading.

Change in the Direction

The other disadvantage of using the pullback pattern is the chance to miss the point of entry. For instance, the strong prevailing trend often has a few pullbacks and a trader may waste this opportunity.

The Risks for Unexperienced Traders

Due to the lack of experience, some traders face the risk of placing too many trades before defining their own strategy in the market.

Further, we will review some basic rules on how to benefit from trading pullbacks.

Pullback Trading Strategy

Identify the existing bullish trend in the market

The first step of trading pullbacks is to identify the market’s primary trend. If it is the uptrend, then you need to look for higher lows and higher highs. Also, you may use the top-down approach along with the weekly chart. To find out the trend, you may use two moving averages and identify the point of crossover – this will be the confirmation of the pullback within the trend. To determine the trend, it is vital to use the higher time frame.

Switch lower to the time frame and wait for the pullback

After completing step one, when you have identified the trend, you may switch to the lower time frame – for instance, 1h time frame. However, it can be any time frame that is convenient for your needs. 

 Place the Fibonacci Retracement tool before the pullback

The next step is to place the Fibonacci retracement indicator in the place between the most recent swing high and the most recent swing low. The following step will be to define the best point to enter the market.

It is time to buy

When you placed the Fibonacci retracement indicator in the right place of the chart, you are able to buy in the area between 50% and 61.8%. It is your decision to use the opportunity to buy at 50% or to wait as it hits 61.8%.

Put the Stop Loss under the Swing Low

Put the protective stop loss in the point of the last swing low applied to chart Fibonacci retracement tool levels. The break under the swing low will help us to get out of the trade and reduce the losses. 

A strategy of taking profits from pullbacks

The following step is to take profit from the trade when you put the profit target at a swing low to buy and at preceding swing high – in order to sell. 

If you are willing to increase the profit, then you can take half of the profits at the new heights and the rest of the benefit at 100% Fibonacci extension. These rules are used for buying trade, and for selling trade, you can apply the same principles but in reverse, as in the following example.

Conclusion

The pullback strategy is the profit-making way to trade stocks or other assets. This strategy can be one of the most rewarding approaches based on the ups and downs of the market prices. The key factor here is to trade in the direction of the prevailing trend, and this will definitely be a success. 

the Latest news

Investing in Ukrainian Real Estate

The real estate market in Ukraine offers great opportunities for investing. Due to the low prices for real estate which dropped by 20-50% since the times of political and economical crisis in 2013, the real estate sector now provides the chance to enter the market and receive significant revenue from the investment.

Read now

Exon Premier

Great opportunities and benefits of investing with the Exon Premier REIT along with the detailed review of 50th avenue apartment and office complex.

Read now