Everything on Pullback Trading

The stock market is most likely described as volatile if you had to put it in one word. Investments in the stock market are made based on technical and fundamental analysis. However, it is impossible to predict when the market will rise or fall. Although you can read the charts and analyze all patterns to formulate strategies, there will be times when the market moves beyond your expectations. We've tried to explain the pullback strategy clearly in this article. Continue reading.

Let us start by explaining what a pullback is.

A price movement that moves against a trend is called pullback. It's essentially a pause in the price chart of a stock or commodity that is not in line with the trend. After a brief period, the price movement returns to the main trend. Usually, it is only for a few sessions. Then the uptrend will resume. A pullback is similar to consolidation and retracement. It occurs when securities prices move at least one bar in the opposite direction of the trend.

What does it tell us?

A pullback is usually viewed as an opportunity to buy after a stock, commodity, or other trading instrument has seen a significant upward price movement. A positive earnings announcement by the company offering shares may cause the stock's price to rise significantly. After a few sessions, traders may begin to exit their positions and the stock could experience a pullback. The positive earnings are a signal that the stock is on the verge of resuming its upward trend.

It is important to note that pullbacks are usually preceded by an uptrend. This means that a stock's prices move into a technical support area such as a pivot point, or a moving average. These key support areas are important to keep in mind as a trader. A breakdown of these areas could indicate a reversal trend rather than a pullback.

Different strategies for pullback

Let's now look at the different strategies.

1. Breakout strategy

This strategy is the most popular. Breakout pullback often occurs at market turning points. This includes price breakouts of consolidation patterns like head and shoulders, triangles rectangles and wedges. This strategy is not profitable and can lead to breakout pullbacks.

2. Horizontal steps strategy

Horizontal steps strategy refers to the natural rhythm of the price. It reflects the market's ebb or flow. Stock price can often show stepping patterns during trending periods. This strategy is a great complement to the breakout strategy. Although the breakout pullback occurs very close to the market's turning point, it can also allow you to find other entry opportunities while the trade progresses. This strategy can be used to safely pull the stop loss behind a trend. You do this by waiting for the price to complete a step, then pull the stop loss back from the previous pullback.

3. Trend-line strategy

Another popular strategy to pullback is trend-line. To validate it, you need three points of contact. You can connect two points randomly as a trader; however, a trend line is only formed when there is a third point. The main drawback of the trend-line strategy, however, is its slow validation. Remember that trend-line pullbacks can only be traded at the third, fourth, or fifth points of contact. You can combine a trend-line drawback with other strategies to make it work. This strategy can be used as a stand-alone method and you may miss many opportunities. Trend-line validations often take a while.

4. Moving averages strategy

This strategy is the most widely used in technical analysis. It can be used in pullback trading as well. You can use either 20, 50, or 100-period moving Averages depending on whether or not you are trading short-term or long-term. Short-term traders tend to use shorter moving averages. These averages are more susceptible to noise and wrong signals. Long-term moving averages are slower than short-term averages but are more susceptible to noise and false signal. If you don't trade often, you might miss short-term trading opportunities.

5. The Fibonacci strategy

The Fibonacci strategy is the final pullback. Fibonacci levels are extremely effective in financial markets. This strategy can also be used for pullback trading by traders. You must wait for a new trend in order to leverage this strategy. Once the trend has emerged, you can use the A-B Fibonacci instrument to draw the trend's end from the point where it began. To pullback, you can use the Fibonacci Retracement's C point. The Fibonacci pullback strategy can be combined with the moving averages strategy. You can also leverage high probability pullbacks if a Fibonacci Retracement is found back in the same spot with moving averages.

Last note:

The stock exchange is a great place to create wealth. You should be familiar with all the terminologies, strategies, and jargons used in the share market. There are many pullback strategies you can use, and some that you can combine. You can reach out to your investment advisor if you are just starting trading. They will be able to help you understand all the strategies.