A majority of new traders who enter into market want to become profitable as soon as possible, but it takes time to become profitable at trading. It’s essential to comprehend how everything works in trading and devise a trading strategy before taking a risk.
Moreover, the market is not kind to traders who join and leave positions without considering the overall market circumstances. Traders, especially newcomers, must plan on carrying a longer-term trading strategy to trade rather than short and fast returns.
When you start trading with this perspective, you will be able to deal with the market’s volatility and avoid losses. In this blog, to help the new traders, we will explain the concept of pullback trading strategy, examples of different pullback trading strategies, and how to trade with it.
What is pullback trading?
Before starting with the pullback trading strategy, let’s try to understand the concept of pullback trade. It is defined as a delay or mild fall in a stock’s price from current peaks happening in an ongoing uptrend.
The price of the stock never stays on a linear line. For new traders, it is important to understand that markets keep changing between a bullish trend (ascending) and bearish trend (descending) direction waves. (The price movements of financial markets are also known as price waves)
In an uptrend, when prices are rising or moving up, the chief or dominant direction waves also move higher, and the correction waves move against the current direction of the trend. When dealing with trading pullbacks, it would be wise for traders to look for those correction phases and then time their trade entries in such times.
A pullback is considered similar to retracement – the momentary lapse of an overarching direction in a stock price, which is temporary. The term pullback can be seen to denote moderately short pricing declines.
For instance, a few straight sessions before the uptrend continues. Many traders see trading pullbacks as purchasing options after the stock or commodity has undergone an upward price trend.
When pullbacks happen, security or stock price move to a place of technical reinforcement. Before continuing their augmentation, a pivot point or moving average is a perfect example.
It is important for traders to carefully observe the key regions of support because a breakdown from these can provide signs of a reversal rather than a pullback. Trend changes direction during reversal, and the price is conceivable to move in the reverse direction for a stretch.
A pullback is one of the basic strategies for traders. The general idea behind a pullback trading strategy is that traders linger for the cost to pull back during an ongoing trend to provide them with a more suitable entry price.
For example, when the stock market is going higher, and you predict that it will continue to move higher, you want to set your foot into a trade for the most subordinate price possible. Trade pullbacks can assist you in uncovering such possibilities.
Example of a pullback strategy
Trade pullbacks generally don’t alter the fundamental narrative. They are great profit-making possibilities due to a strong build-up in a commodity price for savvy investors.
For example, a firm may document blow-out returns (when a business seriously passes gains expectations), witnessing a sharp incline in the prices of shares.
The commodities may undergo pullback the next day because short-term traders will start to withdraw profits. Yet, the robust gains report indicates that the firm underlying the stock is accomplishing something correctly. It supports a maintained uptrend in the near term because investors will be interested in the stocks due to good gains reports, and will keep track of the ongoing trending phases.
Traders can find examples of trade pullbacks within a stretched uptrend in every stock chart. To know more about these pullbacks, traders can review the past stocks, while they can be challenging to assess for investors having a stake in losing value.
Suppose any bank or financial institution announces a financial crisis. As a result of the crisis, the firm’s share witnessed a 20% dip, and short-term traders will panic and started selling their positions.
That will result in a sharp downtrend or bear trend, and after a while, share prices will recover, or a bit of them will fall again.
This small rise, if it happens, in share prices can be utilized by the traders to minimize their losses, and it will provide them with an opportunity to sell away all the shares at better prices.
Since the news indicates a failure by the company’s top management, the prices will fall for a long time. It will lead to a downtrend and constant pullbacks in trading sessions.
Trivago commodities in Pandemic
Another example of an Internet-based trip and accommodation booking enterprise, Trivago, went via a similar situation. Due to the pullback, it surged during the Pandemic. Everyone knows the travel and tourism sector was badly affected in 2020, and the firm’s commodities took a momentary dip.
With more and more availability of vaccines, the company’s stocks started witnessing a rising trend again. With things getting back to normal for the company, clever investors began observing Trivago stakes for trading possibilities.
These mentioned above are a few simplified examples of pullback trading, which will give new traders an idea of what pullback trading is and how investors profit from it.
How to trade with pullback strategies?
Learning and implementing to trade with a pullback trading strategy can be a prominent knack as a trader. In the stock market, pullbacks occur very commonly, and if you know about trading pullbacks, you will improve your stock collection and discover multiple trading opportunities.
Now, let’s discuss the best and most common examples of pullback trading strategies that will help you make profits in the long run.
Observing the Trendlines
Trendlines display the high and low structure in the simplest form that traders can use to identify the trends. A succession of more elevated highs followed by a string of higher lows forms a rising trend. On the other hand, descending lows and descending highs comprise declining trends.
Trendlines are considered to be one of the famous pullback tools. The disadvantage of trendlines is that they take a long time to provide authentic validation. According to the experts, a trendline is validated with three contact points.
You can always connect two random points as a trader, but it’s a trendline when you see the third. Hence, trades in the trendline pullback happen at the third, fourth, or fifth contact point.
Trendlines can be utilized with other pullback methods, and they also work nicely. Still, if you are only going with this method, you may overlook many possibilities due to the long validation.
Horizontal steps
You can observe it amid numerous trending stages throughout all financial markets and is the natural tempo of cost and illustrates the ebb and flow of the market (the cyclical shifting of the waves from down to increased and back to down again.
In constant trending stages, the price will frequently show those stepping routines. This pullback approach can be mixed and used with breakout pullback. As we know, the breakout pullback occurs very near to market turning moments. But if you miss the initial entrance option, the horizontal steps facilitate the trader to discover other possible entry points as the trade advances.
Also, it is a prominent tool for traders. They can use it to pull the stop loss following the trend with safety. On the other hand, the trader stays till the price has finished a step and then pulls the stop loss following the last pullback area.
Breakout
You must always keep in mind that price never moves straight: there will be fluctuations no matter what. Talking about the breakout trading pullbacks, they are common in this line, and most traders might have already witnessed them.
A breakout pullback typically occurs when the price movement breaks from a consolidation pattern during the market’s turning points. There are a few patterns that traders should be aware of, like heads, shoulders, rectangles, wedges, and triangles.
It is all about the timing in breakout pullbacks, and it emerges so often that it makes them more important to consider. According to the experts, there are two types of traders: aggressive and conservative.
The aggressive trader eagerly waits for the stock price to come back to the pullback space, and once it comes back, they enter a trade right away. The reward/risk in this strategy is very high, and the disadvantage is trading in this is against the price direction, and there is no certainty of price, which may go up or down.
On the other hand, conservative trader stays until the price breaks into a new low during an uptrend. Traders wait for the new low then enter, and the potential reward/risk is also less in this approach.
Moving averages
There is no doubt moving averages are mostly used in technical analysis and employed in numerous forms. And the best thing about them is they can be utilized in pullback trading.
Traders can use any period of moving average, but there is one thing to consider, i.e., whether you are a long-term or short-term trader. These traders use moving according to their needs.
Short-term traders use shorter averages like 20 or maybe go up to 50. Moreover, in the case of short-term traders, the risk is very high. On the other hand, long averages move slower and are less risky, but you may miss other trading chances. Both sets have their pros and cons; however, it is a great tool to find an entry position if you miss a pullback.
Fibonacci levels
Fibonacci levels are renowned and work very well in the financial markets, and pullback traders can also utilize this tool for trading purposes. For that, new emerging trends are essential for this tool to work. And when a new trend occurs, they draw the A-B Fibonacci tool from where the trend originated to the end of that particular wave.
There is one more thing about the Fibonacci retracements, i.e., they are particularly successful when integrated with moving averages. When a moving average overlaps with a Fibonacci retracement, that is the pullback region. There are many other tools that stand alone do not provide great results, but they produce the best results when combined with others.
A combination of Trendline and Fibonacci
In this approach, traders can use the trendline and Fibonacci levels to find the pullbacks and trade. Foremost, we need to find a bull trend, which can be done by looking for higher highs and higher lows series. Now time to switch to the selected time frame once you successfully spot the pattern. You can use any timeframe according to your needs.
For instance, we will be using the 1h time for this pullback trading approach. You need to mark the lowest and highest swings from the most recent swing and place the Fibonacci retracement indicator.
The recent swing low, which you utilized to construct the Fibonacci retracement levels, will find a very appealing area to bury your shielding stop loss. To earn profit from pullback trading, you also need a profit-making strategy.
Traders or investors can use these strategies while trading in pullbacks. But before you start trading, you must study for 3 to 6 months because it’s not a one-day job. You need a lot of experience before trading. Without any experience, you may lose, so it’s better to take precautions.
We have explained the most prominent strategies that you can utilize while trading the pullbacks, and it’s up to you which method you want to use because, as we have mentioned, you can also use a combination of different strategies.
Different strategies provide traders with a better entry position if you miss the pullback. Fibonacci levels can be integrated with moving averages or trend line to find better opportunities in pullback trading.
The Bottomline
We have explained every detail related to a pullback trading strategy with examples in this blog. The pullback trading strategy may be one of the most promising and profitable trading strategies known, and it has shown to be most effective in many cases. Whether it is to find alternative entry scenarios or identify the primary trend, there is almost always a chance of making a profit only if you apply the correct trading strategy.
The key to its high success rate is that traders trade in the direction of the most prevailing trend.
You must be able to find a weakness in the uptrend and sell strength in a downtrend. It is one of the basic strategies to profit from pullback trading. If you can master the pullback trading strategy, it will profit you in the long run.
