6 Price Action Pullback Trading Strategy Types You Should Know
In this article, I will discuss 6 Price Action Pullback Trading Strategy Types you should Know as a Trader. So, as part of this article, we will discuss the following pointers.
- What are Pullbacks?
- The Psychology Behind the Pullback Trading Strategy?
- Benefits of Pullback Trading Strategy
- Characteristics of Strong and Week Pullback in Trend
- 6 Types of Pullback Trading Strategy
- Where does Pullback end?
- Conservative vs. Aggressive Entry
- 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 called a pullback. That happens frequently in any financial market and allows traders 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. 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
- Movements with the trend are called “impulses/extensions.”
- 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:
- 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.”
- Higher Probability Entries Improve your win rate: -as Trading with the direction of the primary trend.
- easy to trade pullback than any other entry: Pullback trading strategy provides clear entry and exit signals based on key levels
- 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
- Versatile: A pullback trading strategy Can be applied across any financial market, including forex, stocks, and commodities.
Drawbacks of Pullback Trading Strategy
- 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.
- 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.
- 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:
- 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 keep going with minimal retracements. As a result, trading can be frustrating.
- 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:
- Determine the Trend: The first step is determining the market’s current trend. This can be achieved by looking for higher and lower highs in an uptrend or lower lows and higher highs in a downtrend on price charts.
- 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 and important levels like flip support resistance zone. supply demand zone, Fibonacci retracements, moving averages, or trend lines might help you do this.
- 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 other indicators.
- 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 fail is trading against the trend when there isn’t a trend or when the trend is of poor quality.
- Strong trends are more likely to succeed.
- Low-predictability trends are poor or weak trends.
- Trading pullback after the end of the trend is a disaster
So, 3 factors to check in trend analysis before taking a pullback entry
- Quality of trend. I prefer the start of a trend. generally, the trend ends either in climax or divergence in an impulse move
- The momentum of the last impulse moves. clean move supported by smart money
- The first pullback is the best pullback entry.
Below is an example of a healthy uptrend. Price making higher high higher low.
Price makes Lower High (LH) and Lower Low (LL).
The last impulse move should be supported 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
- Flip support resistance zone
- Trend line
- Moving average
- Fibonacci retracement level
- Supply or demand zone
- 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. 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 occur. At these retracement levels, traders have a good chance to open new trades that align 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 signals 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
- 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, you can enter using any of the below methods.
- Reversal candlestick patterns. Aggressive entry. if multiple confluence zones support
- Trendline break. Conservative entry.
- 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 valuable information about the market sentiment and potential price movements. Here are some candlestick patterns that traders commonly use 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
- Basically, GO TO a LOWER TIME FRAME and LOOK FOR a STRUCTURE BREAKOUT
- 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.
- 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.
Price Action Pullback Trading Strategy Types Summary:
Pullback trading strategies are central to many traders who focus on price action. A pullback in a trend provides a potential opportunity for entering a trade in the direction of the overall trend at a more favorable price. There are several types of pullback trading strategies based on price action:
1. Simple Pullback (Retracement) Strategy
This involves entering a trade when the price retraces to a short-term moving average, Fibonacci level, or a previous support/resistance area within a trend.
- Bullish Setup: Enter a long position during a pullback in an uptrend when the price touches or approaches a key support level.
- Bearish Setup: Enter a short position during a pullback in a downtrend when the price touches or approaches a key resistance level.
2. Moving Average Crossover Pullback:
In this strategy, traders look for the price to pullback to a key moving average and then enter a trade on a crossover signal.
- Bullish Setup: Buy when the price is above a significant moving average and dips to touch it, then bounces off with a crossover of a shorter moving average above a longer one.
- Bearish Setup: Sell when the price is below a significant moving average and rallies to touch it, then falls off with a crossover of a shorter moving average below a longer one.
3. Trend Line Pullback:
Here, traders draw trend lines along swing highs and lows in a trend. A pullback to the trend line that holds can be a good entry point.
- Bullish Setup: Buy when the price pulls back to an ascending trend line in an uptrend and shows signs of resuming the upward move.
- Bearish Setup: Sell when the price pulls back to a descending trend line in a downtrend and shows signs of continuing the downward move.
4. Channel Pullback:
Traders using this strategy will enter trades when the price pulls back to a channel or envelope within a trend.
- Bullish Setup: Buy when the price hits the lower channel line in an uptrend and rises.
- Bearish Setup: Sell when the price hits the upper channel line in a downtrend and then begins to fall.
After a breakout from a range or other chart pattern, the price often pulls back to the breakout point, which can now act as support in an uptrend or resistance in a downtrend.
- Bullish Setup: Buy when the price breaks above resistance, pulls back and finds support at the breakout level.
- Bearish Setup: Sell when the price breaks below support, pulls back and finds resistance at the breakout level.
6. Candlestick Pattern Pullback:
This strategy involves entering a trade when a pullback results in a specific candlestick pattern that suggests continuing the trend.
- Bullish Setup: Look for bullish reversal patterns like hammers, engulfing patterns, or morning stars during a pullback in an uptrend.
- Bearish Setup: Look for bearish reversal patterns like shooting stars, engulfing patterns, or evening stars during a pullback in a downtrend.
7. Fractal Pullback:
A fractal pullback strategy uses fractals (patterns that repeat on different time scales) to identify potential reversals during a pullback.
- Bullish Setup: Buy when a bullish fractal pattern occurs during a pullback in an uptrend.
- Bearish Setup: Sell when a bearish fractal pattern occurs during a pullback in a downtrend.
8. Volume-Confirmed Pullback:
Volume plays a crucial role in confirming the strength of a pullback and the likelihood of trend continuation.
- Bullish Setup: Buy when a pullback on low volume is followed by an increase in volume as the price resumes its uptrend.
- Bearish Setup: Sell when a pullback on low volume is followed by an increase in volume as the price resumes its downtrend.
When using these strategies, it’s crucial to have strict risk management rules in place, including the use of stop losses and position sizing appropriate to your risk tolerance. It’s also recommended to backtest any strategy before live trading to ensure it has a positive expectancy in the current market conditions.
In the next article, I will 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.
About the Author: Pranaya Rout
Pranaya Rout has published more than 3,000 articles in his 11-year career. Pranaya Rout has very good experience with Microsoft Technologies, Including C#, VB, ASP.NET MVC, ASP.NET Web API, EF, EF Core, ADO.NET, LINQ, SQL Server, MYSQL, Oracle, ASP.NET Core, Cloud Computing, Microservices, Design Patterns and still learning new technologies.