6 Price Action Pullback Trading Strategy Types You Should Know

Back to: Trading with Smart Money

6 Price Action Pullback Trading Strategy Types You Should Know

In this article, I am going to discuss 6 Price Action Pullback Trading Strategy Types that you should Know as a Trader. So, as part of this article, we are going to discuss the following pointers.

1. What are Pullbacks?
2. The Psychology Behind the Pullback Trading Strategy?
3. Benefits of Pullback Trading Strategy
4. Characteristics of Strong and Week Pullback in Trend
5. 6 Types of Pullback Trading Strategy
6. Where does Pullback end?
7. Conservative vs Aggressive Entry
8. Pullback Day Trading Strategy

Price Action Pullback Trading Strategy

What are Pullbacks in Trading?

On any financial market, the price never moves in a straight line and is typically described in terms of bullish (rising) waves and bearish (falling) waves. A temporary correction or retracement in the opposite direction of the current market trend is referred to as a pullback. That happens frequently in any financial market and gives traders the chance to enter a trade at a better price before the trend continues with the primary direction.

For example, during a pullback in an uptrend, the price moves lower (against the prevailing up waves CALLED impulse waves) before moving back up in the primary trend’s direction. In order to time trade entries during these corrective waves when trading pullbacks, traders look for those correction waves.

As you know price action has a zig-zag form

1. Movements with the trend are called “impulses/extensions”.
2. Movements against the trend are called “correction/retracement/pullback”.

Psychology Behind Pullback Trading Strategy

The psychology behind pullbacks in trading can be caused by two main factors: market participants’ fear and greed. When a market is trending, traders who missed the original entry may regret it and be ready to enter the trade at a better price because it gives them the chance to do so.

Benefits of Pullback Trading Strategy

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

1. Trading with the direction of the primary trend: – Everyone has heard that, “The trend is your friend until it ends”, pullback trading is “trading with the trend”
2. Higher Probability Entries Improve your win rate: -as Trading with the direction of the primary trend.
3. easy to trade pullback than any other entry: Pullback trading strategy provides clear entry and exit signals based on key levels
4. Better Risk Rewards – Since you are entering a trade closer to a key level pullback entry allows you to place a “tighter” stop loss on a trade
5. Versatile: A pullback trading strategy Can be applied across any financial market including forex, stocks, and commodities.

Drawbacks of Pullback Trading Strategy

1. False Signals: The pullback trading method occasionally produces signals that aren’t true, which can lead to losses. Traders must be able to differentiate between true pullbacks and reversals.
2. Timing in pullback trading: When using a pullback trading method, timing is essential. The trader may lose money or miss out on possible gains if they initiate the trade too early or too late.
3. Market volatility: Using the pullback trading method in highly volatile markets can be difficult. This is because it may be more difficult to recognize between actual pullbacks or reversals. 

Discipline in Pullback Trading: 

1. More Missed Trades- sometimes when waiting for a retracement that doesn’t happen or no valid entry signal or doesn’t retrace enough to trigger the more conservative entry that comes with a pullback. Instead, they may just keep going with minimal retracements. As a result, trading can be frustrating.
2. A pullback trading strategy requires discipline and patience. Traders must wait for confirmation of a pullback before entering the trade.

How to Trade with Pullback Trading Strategy?

Using a price action pullback trading method involves the following steps:

1. Determine the Trend: The first step is to determine the market’s current trend. This can be achieved by looking for higher highs and lower lows in an uptrend or lower lows and higher highs in a downtrend on price charts.
2. Locate Potential Pullback Areas: After the trend has been determined, the next step is to locate potential pullback locations. Searching for locations of support and resistance as well as important levels like flip support resistance zone. supply demand zone, Fibonacci retracements, moving averages, or trend lines might help you do this.
3. Wait for Confirmation signal for entry: Once a potential pullback location has been identified, the trader should wait for confirmation that the price is taking support in an uptrend or resistance in a downtrend. This can be done by looking for divergence, candlestick patterns, volume, or any other indicator.
4. Entry and place stop loss below swing low or support in an uptrend or place stop loss swing high or resistance in a downtrend.

Let us discuss each point in detail

Step 1 Determine the Current Trend and Momentum:

The first step is to determine the market’s current trend.

Why is Trend Analysis Used in Trading?

One of the biggest reasons traders fails is trading against the trend, when there isn’t a trend, or when the trend is of poor quality.

1. Strong trends are more likely to succeed.
2. Low-predictability trends are poor or weak trends.
3. Trading pullback after the end of the trend is a disaster

So, 3 factors to check in trend analysis before taking a pullback entry

1. Quality of trend. Prefer the start of a trend. generally, the trend ends either in climax or divergence in an impulse move
2. The momentum of the last impulse move. clean move supported by smart money
3. The first pullback is the best pullback entry.

UPTREND

Below is an example of a healthy uptrend. Price making higher high higher low.

DOWNTREND

Price makes Lower High (LH) and Lower Low (LL).

Impulse move

The last impulse move should support by volume and candle size increasing. This suggests smart money behind the move

The left side move has strong momentum. Strong trends are more likely to succeed. The right side has weak momentum. Low-predictability trends are poor or weak trends.

Step 2 Locate Potential Pullback Areas:

Where does the pullback end? After the trend has been identified, the next step is to locate a potential pullback end. A possible location for pullback entry is

1. Flip support resistance zone
2. Trend line
3. Moving average
4. Fibonacci retracement level
5. Supply or demand zone
6. Continuous chart pattern breakout

Wait for the price to pull back to the above zone for pullback entry. Let us discuss below 6 types of Pullback Trading Strategy

Flip support resistance zone Pullback trading strategy

This flip support resistance strategy involves using support and resistance levels to identify potential pullback areas in the market. Traders can look for price action signals and volume to confirm the pullback and enter the trade in the direction of the current trend.

Trendline Pullback Trading Strategy

The trend line strategy involves drawing trend lines on a price chart to identify the current market trend i. When the price retraces to the trend line, traders can look for price action signals to confirm the pullback and enter the trade in the direction of the current trend. For more details about Trendline click here.

Moving Average Pullback Trading Strategy

Fibonacci Retracement Level Pullback Trading Strategy

The underlying principle of the Fibonacci retracement trading method predicts that after a new trend direction begins, the price will retrace before continuing in the trend’s direction. In order to determine the likely support and resistance levels, we use the Fibonacci tool. The retracement level anticipates the highest level at which retracement is most likely to take place. At these retracement levels, traders have a good chance to open new trades that are in line with the trend. 23.6%, 38.2%, 50%, 61.8%, 78.6%, and 100% are the Fibonacci retracement levels. For more details about Fibonacci click here.

Supply Demand Zone or Order Block Pullback Trading Strategy

Supply Demand Zone Trading or Order Block Trading Strategy is a trading technique that involves spotting important price levels on a price chart and trading off of them. Traders who use this strategy search for locations where there has been a lot of buying or selling in the past, as these zones may later serve as locations of support or resistance. For more details about Order Block click here. For more details about the Supply Demand Zone click here.

Continuous Chart Pattern Pullback Trading Strategy

During an existing trend, a continuous chart pattern is a specific kind of technical analysis pattern that is considered to signal the trend’s continuation. These patterns are referred to as “continuous” because it is believed that they represent a temporary consolidation or pause within an existing trend rather than a trend reversal. Some continuous chart patterns are

1. Wedges
2. Pennant 
3. Flags
4. Ascending Triangle and Descending triangle and Symmetrical triangle

For more details about Chart Patterns click here

Step 3 Wait for Confirmation Signal for Entry:

Once a potential pullback location has been identified, the trader should wait for confirmation that the price is actually taking support in an uptrend or resistance in a downtrend. This can be done by looking for candlestick patterns and volume with wave momentum or any other indicator.

How to Enter Your Trades on a Pullback?

Depending on open types of pullbacks, then you can enter using any one of the below methods

1. Reversal candlestick patterns. Aggressive entry. if multiple confluence zone support
2. Trendline break. Conservative entry.
3. Structure break. More conservative entry

Below is an example in a single graph.

Reversal Candlestick Patterns

Any reversal candlestick pattern. reversal Candlestick patterns can provide traders with valuable information about the market sentiment and potential price movements. Here are some candlestick patterns that traders commonly used for trading signal confirmation: bullish engulfing and bearish engulfing. hammer and inverted hammer. shooting star and evening star.

The volume at the bottom of the reaction should be high on the pullback and low in the trap. As (the stock) started to rally away from the bottom of the reaction, both volume and spread should increase (widespread, good progress, and high volume. Which indicates a resumption of the rally)

Trendline Breakout Entry

Draw a trendline, and wait for the price to break out above or below the trendline. This indicates a potential change in direction or end of pullback .to confirm the breakout volume should be high. If the breakout is confirmed with volume, enter the trade in the direction of the breakout. As (the stock) started to rally away from the bottom of the reaction, both volume and spread should increase (widespread, good progress, and high volume. Which indicates a resumption of the rally).

Structure Breakout Entry

1. Basically, GO TO a LOWER TIME FRAME and LOOK FOR a STRUCTURE BREAKOUT
2. Wait for the price to break out above the resistance or below the support. This indicates a potential change in direction or end of the pullback.to confirm the breakout volume should be high. If the breakout is confirmed with volume, enter the trade in the direction of the breakout.
3. As PRICE started to rally away from the bottom of the reaction, both volume and spread should increase That indicates a resumption of the TREND.

In the next article, I am going to discuss the Top Mistakes to Avoid When Pullback Trading and How to Overcome Them. Here, in this article, I try to explain 6 Price Action Pullback Trading Strategy Types that you should Know as a Trader. I hope you enjoy this 6 Price Action Pullback Trading Strategy Types article. Please join my Telegram Channel and YouTube Channel as well as my Facebook Group to learn more and clear your doubts. Please watch the following video if you want to learn and understand this concept in a better way.