Top Mistakes to Avoid When Pullback Trading and How to Overcome Them?
In this article, I will discuss the Top Mistakes to Avoid When Pullback Trading and How to Overcome Them. Please read our previous article discussing 6 Price Action Pullback Trading Strategy Types you should Know as a Trader.
What is the Pullback Trading Strategy?
A pullback is a temporary correction or retracement that occurs in the direction opposite to the current market trend. The pullback trading strategy is a popular strategy used by many experienced traders to take advantage of this temporary correction or retracement to enter the trend.
The pullback trading strategy is one of the most popular and successful trading methods used by many traders and investors. The key to success in the pullback trading method is understanding the principles behind pullback trading and taking steps to minimize risk in pullback trading. Knowing what and when to avoid pullback trading can help you maximize your profits and minimize losses. In this article, I will discuss some common mistakes pullback traders make and how to overcome them.
What are the Mistakes to Avoid When Trading Pullbacks?
Pullback trading is a popular strategy used by many experienced traders to take advantage of temporary market reversals. However, even the most experienced traders can make mistakes that can cost them when implementing this strategy.
Imagine the market in an uptrend and pulls back, and you buy, but the market keeps falling. What is going on? What is wrong with pullback trading? Let us discuss some mistakes to avoid during pullback trading.
Ignoring Market Structure While Trading Pullback
One of the most important mistakes that traders make is ignoring market structure. It is a critical factor in pullback trading. Market structure refers to the direction and strength of the trend. Traders who ignore Market structure can lead significant losses. So, Market structure refers to the direction and strength of the trend. means Not all trends are created equal. Some are strong, and some are weaker trends.
Ignoring market structure in pullback trading can lead to poor trading decisions and potential losses. To avoid this mistake, traders must pay attention to Market structure first. They should analyze charts, and they should only take trades that are in the direction of the prevailing trend. Before entering any pullback trades, identify the market structure, including the direction of the trend and strength of the trend, key levels of support and resistance, or supply and demand zone. Some mistakes are ignoring the market structure.
- Perceiving a Trend to be in place when the market is ranging or trading a weak trend or end of the current trend
- After the climax of Trend
Avoid the desire to enter a trade based solely on a potential pullback without considering the market structure.
Strong Trend and Weak Trend
A strong trend has higher predictability than a weak trend.
Characteristics of a Strong Trend
- Depth of Pullback < previous depth of pullback (shallow pullback)
- Thrust > last thrust (valid breakout and momentum increasing after breakout)
- Volume increasing on impulse move and decreasing on a pullback (a move supported by smart money)
Characteristics of Weak Trend
- Pullback < previous pullback (deep pullback)
- Thrust > last thrust (momentum slowing down). shortening of thrust (SOT)
- The volume rises during impulse movements and falls during pullbacks.
Thrust Refers to the distance between the current swing high and a previous swing high (in an uptrend) or swing low (in a downtrend). A stronger trend may be developing if the thrust increases. A potential sign of trend weakness is a shortening of thrust.
DEPTH of Pullback refers to the distance with which a price retraces the previous up move or impulse move. An indication of a trend’s possible weakness is increased depth. Reduced depth indicates a trend’s potential strength.
The market is STRONGLY BULLISH if both the PRICE and the VOLUME are rising. The market is WEAKLY BULLISH if the PRICE increases, but the VOLUME is decreasing.
LET’S DO THIS IN THE CHART
NOW study the above chart with respect to thrust (T), depth of pullback(P), and volume
T1 and P1 = IMPULSE move supported by volume and shallow pullback with less volume. Sign of a strong trend can look for long opportunity (pullback trading in a bullish trend)
T2 >T1 and volume increasing == sign of strong trend as momentum increases with the trend, we will look for long opportunity in the pullback.
P2>P1 but very less and T2>T1, the volume also decreasing on the pullback, we can look for a long trade.
Now check the P3 pullback.
T3< T2 and T1 = momentum decreasing. The shortening of Thrust is a sign of potential trend weakness.
P3>P2 and P1 == Increased depth is a sign of the potential weakness of a trend.
The volume also decreases in impulse movement. We can avoid pullback trading in this case.
Let us Check Another Example of a Weak Trend.
It is a wise decision to avoid pullback when the trend is weakening. Weakening in trend refers to showing signs of slowing down or reversing the trend. The risk of a trend reversal is higher when the trend is weakening. This means that instead of the price resuming its original trend, it may change the original direction, resulting in losses. Decreased momentum or thrust or buying/selling pressure: The lack of strong buying or selling interest in the trend, Traders may find themselves caught in a range or choppy market, making it challenging to make profitable trades.
When a trend is weakening, market participants may become uncertain about the future direction of the price. This uncertainty can increase volatility, characterized by sharp price swings and unpredictable movements. Pullbacks in volatile markets can make it difficult to trade and make a profit.
Pullbacks in a weakening trend can give conflicting signals. It becomes more difficult to determine whether a pullback is a temporary retracement within the original trend or the beginning of a new trend reversal. Traders may receive mixed signals, leading to uncertain decisions and potential losses.
Trading Pullback After Climax
Selling climaxes are one of the strongest indications of a major market reversal and the start of a new trend in the opposite direction. After a climax, there is a higher probability that the trend will reverse or consolidate, leading to whipsawing price movements that can be difficult to trade pullback profitably. A selling climax in a downtrend is essentially a period of extremely heavy panic selling, which creates an over-extended or oversold market.
How to Identify Selling Climax in Trend?
- Three should be a trend (stage 4) and overextended
- At the end of the move, volume spike and wide candle
As u can see in the above chart. after heavy selling with volume, becomes overextended, then the price reverses. Avoiding pullback trading after a climax can help traders avoid potential losses and wait for more favorable market conditions for pullback trading
Not Adjusting for Changes in The Market Condition
Pullbacks occur when the price temporarily retraces against the trend. These pullbacks can give trading opportunities to those who can identify correctly and act quickly. However, market conditions can change quickly, and if you do not adjust according to market conditions, change can lead to loss.
A blender mistake that traders make is not adjusting for changes in the market. Pullback trading relies heavily on the strength of pullback, but trends and pullback can change rapidly, and traders who fail to adjust their strategies accordingly can lose money.
To avoid this mistake, traders should be aware of changes in the market and adjust their strategies accordingly. For example,
- The trading pullback shows consecutive strong candles with volume increasing. (Change in momentum)
- When the price returns from a higher time frame supply and demand zone (v reversal)
- After consolidation
The trading pullback shows consecutive strong candles with volume increasing.
The trading pullback shows consecutive strong candles with volume increasing. This suggests momentum shifting against the previous trend. how?
- If the PRICE is rising and VOLUME is rising, it means the market is strongly BULLISH.
- If the PRICE is rising but VOLUME is falling, the market is WEAKLY BULLISH.
When consecutive strong candles with increasing volume occur during a pullback, it may be a sign that the trend is weakening, and a reversal may have occurred. This can be a sign of a potential trend shift, and it may be a wise decision to avoid taking trades in the direction of the original trend. So, we want to take a pullback reversal in the downtrend if the price increases and volume decreases. Now, take the same example, but here, we analyze the pullback moves instead of an impulse move.
When pullbacks show consecutive strong candles with increasing volume, it may be a sign that the trend is weakening and momentum shifting, and a reversal may be imminent. Traders may want to avoid trading pullbacks in these conditions.
As you can see, when consecutive candles close higher and volume increases, one can avoid pullback reversal trading with the trend. can wait for more information. Be prepared to adjust your pullback trading strategy based on changes in market conditions. This may involve waiting for more confirmation before entering a trade.
Trading Pullback After Consolidation
A phase of sideways movement in the market known as consolidation occurs when prices move within a range without showing a clear trend. It can be difficult to predict the market’s future direction when a pullback follows a period of consolidation, and there may be a higher chance of being caught in a false pullback or trend reversal.
- It might be difficult to tell if a pullback represents a short retracement or the beginning of a new trend.
Traders may want to avoid trading pullbacks after the consolidation as it can be challenging to predict the future direction of the market accurately,
When is the Price Returning from a Higher Time Frame Supply and Demand Zone?
Supply and demand zones are areas in the chart where significant buying or selling pressure has occurred. When a price returns after test from a higher timeframe supply or demand zone, it may indicate that the market sentiment has shifted. Trading pullbacks in this situation might be risky as the original trend may no longer be sustainable, and there may be a higher probability of prices moving in the opposite direction. This significant supply and demand zone can make it more difficult to predict the future direction of the market accurately.
The market is in a downtrend and reaches the supply zone in the higher time frame, but the lower time frame trend is up.
Now check the lower time frame market structure of the chart. The trend is bullish with strength when approaching the supply zone of a higher time frame.
Now check the below chart when the price reacts from a higher time frame supply zone.
It is better to avoid or look for more confirmation. When a price is returning after testing from a higher timeframe supply or demand zone,
Trading Pullback Too Early
Pullbacks occur when the price temporarily retraces from its recent high or low. These pullbacks can give trading opportunities to those who can identify correctly and act quickly. However, if you enter too, it can lead to loss. This mistake is commonly found in pullback trading as predicting the perfect entry point is difficult, sometimes too early, sometimes too late.
Too early in pullback trading: trading pullback too early is like FOMO entry (fear of missing opportunity, which can lead to losses. 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.
One of the most common mistakes traders make is to enter a position too early without waiting for the confirmation of reversal or the end of the pullback. A pullback trading strategy requires discipline and patience. Traders must wait for confirmation of a pullback before entering the trade. It is important to wait for the price to break out of the pullback zone (the reverse direction) and then take a position in the direction of the trend. Without confirming the pullback reversal, the Possible Outcome of an early entering trade.
- Failed trade
- Or after hitting your stop loss price moving in your direction
To overcome this mistake, traders should use technical tools like trendline breakout or market structure breakout and wait for the confirmation of the breakout before taking a position. By doing so, traders can avoid entering a position too early in the pullback.
Note: you can check this microstructure in the lower time frame for better clarity. Let me give you an example. Let us look at the chart below.
The market is in a downtrend and giving pullback with low volume. Now, check the chart below.
Price keeps moving higher without breaking micro support in a pullback, and ultimately, the price breaks the structure and turns bullish. Now check the chart below and find the difference between why this pullback trade works.
Top Mistakes to Avoid When Pullback Trading and How to Overcome Them
Pullback trading is a popular strategy that involves looking for opportunities to enter a trending market when the price retraces to a certain level, such as a key moving average or support/resistance level. While it can be profitable, there are common mistakes traders make when implementing this strategy. Here are some of the top mistakes to avoid when pullback trading and how to overcome them:
1. Misidentifying the Trend
- Mistake: Traders often misjudge the strength or direction of the trend and attempt to trade pullbacks in a market that is actually ranging or reversing.
- Solution: Use multiple time frame analysis to confirm the trend. Look for higher highs and higher lows in an uptrend or lower lows and lower highs in a downtrend on both short-term and longer-term charts.
2. Trading Against the Trend
- Mistake: Entering a trade against the prevailing trend, mistaking a reversal for a pullback.
- Solution: Always trade in the direction of the underlying trend. Use trend confirmation tools such as moving averages, ADX, or trendlines.
3. Entering Too Early
- Mistake: Jumping in as soon as the price starts to pull back without waiting for confirmation that the pullback is over.
- Solution: Wait for confirmation signals such as candlestick patterns (e.g., hammer, engulfing patterns) or when the price returns toward the trend.
4. Setting Stop Losses Too Tight
- Mistake: Placing stop losses too close to the entry point, not allowing the market enough room to ‘breathe’.
- Solution: Set stop losses below a recent swing low in an uptrend or above a swing high in a downtrend. Alternatively, use the Average True Range (ATR) to set stops based on market volatility.
5. Chasing the Market
- Mistake: Entering a trade during the late stages of a pullback or after the price has moved significantly back in the direction of the trend.
- Solution: Be patient and disciplined. If you miss the initial move, wait for the next pullback or another trading opportunity.
6. Ignoring Volume
- Mistake: Not paying attention to volume, which can indicate the strength of a pullback.
- Solution: Look for decreasing volume on the pullback, indicating that the retracement is weak and likely to reverse. Increasing volume on the trend resumption can confirm the move.
7. Lack of a Solid Plan
- Mistake: Trading without a predefined plan or set of rules.
- Solution: Develop a clear trading plan with entry, exit, and risk management rules and stick to it.
- Mistake: Taking every pullback as a trading opportunity, leading to overtrading and increased transaction costs.
- Solution: Filter pullback trades with additional criteria, such as trading only in the direction of the overall market or only after significant news that supports the continuation of the trend.
9. Not Taking Profits
- Mistake: Holding onto a position for too long, expecting maximum profit instead of being realistic about market conditions.
- Solution: Set realistic take-profit levels based on key support and resistance levels or a set risk-reward ratio.
10. Emotional Trading
- Mistake: Letting emotions drive trading decisions, leading to impulsive trades or deviating from the plan.
- Solution: Rely on your trading plan and analysis. Practice emotional discipline and consider using automated trading orders to help execute your strategy objectively.
Pullback trading can offer high probability entry points within a trend, but like any strategy, it requires discipline and sound risk management. By recognizing these common mistakes and implementing solutions to avoid them, traders can improve their chances of success with the pullback trading strategy. It’s always recommended to backtest and paper trade before going live to ensure your understanding and application of the strategy are sound.
What are the Benefits of Pullback Trading?
The Pullback Trading Strategy has many advantages. Here are a few of them:
- Trading in the primary trend’s direction: Pullback trading is “trading with the trend,” according to the adage that “the trend is your friend until it ends.”
- Entries with a Higher Probability Increase your success rate: -as Trading in the dominant trend’s direction.
- Pullbacks are simpler to trade than any other entry: The pullback trading method uses key levels to produce distinct entry and exit signals.
- Better Risk Rewards – Placing a “tighter” stop loss on a trade is possible because you are entering it near a crucial level retreat.
- Versatile: An approach to trading pullbacks can be used in any financial market.
What is the Best Way to Trade Pullbacks?
There is various method to trade pullback. here is some pullback method generally used by traders
- Pullback trading with Flip support resistance zone
- Trendline pullback trading
- Moving average pullback trading
- Fibonacci retracement pullback trading
- pullback trading with Supply or demand zone
- Continuous chart pattern breakout
What is the best way to overcome mistakes in pullback trading?
A pullback trading strategy is a key part of any successful trading strategy. But like any skill, it takes practice to avoid common mistakes in pullback trading. There are a few mistakes in pullback trading that can be avoided while trading pullbacks.
In this article, we have discussed all possible mistakes that can be avoided while trading pullback, such as
- Ignoring market structure while the trading pullback
- Not adjusting for changes in the market condition
- Trading pullback too early.
In the next article, I will discuss Pullback or Reversal in Trading: How to Spot the Difference? Here, in this article, I try to explain the Top Mistakes to Avoid When Pullback Trading and How to Overcome Them. I hope you enjoy this Top Mistakes to Avoid When Pullback Trading and How to Overcome Them 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.