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4 Price Action Pullback TRICKS You Need To Master (How To Trade Corrections Like A Pro) - YouTube
Channel: The Secret Mindset
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Youâve probably heard the word âpullbackâ
or âretracementâ or âcorrectionâ quite
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frequently if youâre interested in trading
the financial markets.
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So, what is a pullback?
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A pullback in a market is a pretty easy concept
to define and understand.
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Itâs a period when price retraces back on
a recent move, either up or down.
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Itâs basically a reversal of a recent price
move.
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Why are pullbacks important?
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For a number of reasons: they are opportunities
to enter the market at a âbetter priceâ,
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they allow for optimal stop loss placement,
improved risk reward and more.
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A pullback entry is more conservative than
a âmarket entryâ for example and is considered
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a âsaferâ entry type.
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Ultimately, the goal of a trader is obtain
the best entry price and manage risk as good
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as possible whilst also increasing returns
and the pullback entry is a tool that allows
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you to do all three of these things.
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So here is why pullback trading is very important:
First, when identified correctly, will offer
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you higher probability entries
The very nature of a pullback means that price
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is likely to continue moving in the direction
of the initial move when the retrace ends.
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Hence, if you see a strong price action signal
at a level following a retracement, itâs
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a high-probability entry because all signs
are pointing to price bouncing from that point.
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Now, it doesnât always happen, but waiting
for a retrace to a level with a signal, is
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the highest-probability way you can trade.
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Markets rotate back to the âmeanâ or âaverageâ
price over and over; this is clear by looking
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at any price chart.
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So, when you see this retrace happen, start
looking for an entry point there because itâs
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a much higher-probability entry point than
simply entering âat marketâ like most
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traders do.
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Second, it offers better risk rewards.
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Pullback entries theoretically allow you to
place a âsmallerâ stop losses on a trade
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because youâre entering closer to a key
level.
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So, if you choose to do so, you can place
a stop much closer.
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For example: a 100 pips stop and 200 pips
target can easily become a 50 pip stop and
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250 pip target on a retrace entry.
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Of course: you donât need to place a smaller
stop loss, itâs optional, but the option
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is there on a pullback entry if you want it.
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And, at the same time, a pullback entry allows
more flexibility with your stop loss placement.
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Of course, there are some negative aspects
in what concerns waiting for a pullback.
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You will have less trades in general.
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A lot of the time, markets simply donât
retrace enough to trigger the more conservative
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entry that comes with a pull back.
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Instead, they may just keep going with minimal
retracements.
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This means you will have less chances to trade
as compared to someone who isnât primarily
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waiting for pullbacks.
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Also, you will have more missed trades.
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Some potential good trades will âget awayâ
when waiting for a retracement that doesnât
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happen, for example.
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This can test your nerves and will annoy you
sometimes.
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But, missing out on trades is not the worst
thing in the world and itâs better to miss
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out on some trades than to over-trade.
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Now that you now the pros and cons of a pullback
approach, letâs take a look at some of the
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different pullback entry type, so that you
can get a clear look at what they might look
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like.
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1.
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Pullback entry without any price action signal
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In this chart, you can see price pulled back
to the key horizontal level shown in the chart.
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There was no obvious price action signal here
but we can see price quickly sold-off from
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that level after just barely pushing above
it.
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This provided a very high potential risk reward
scenario if you decided to enter on a âblind
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entryâ at that level with a tight stop loss.
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Thatâs the most aggressive entry.
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As soon as the price hits an important level,
you sell or buy at market immediately.
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You do not wait to confirm your buy or sell
signals with reversal candlesticks or signals
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from indicator.
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You just immediately buy or sell at market.
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If price hits the key level and bounces back,
you make money, if not, you lose.
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Itâs that simple.
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2.
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Pullback to key level with price action confirmation
A more conservative trading strategy is to
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wait for price to retrace back up or down
to an existing key level on the daily chart
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time frame, then watch for an obvious price
action signal to form there.
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This is one of the highest-probability ways
to trade.
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A way to look for confirmation when using
pullbacks would be to look at Japanese candlestick
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formations because these tend to be reliable
signals of a reversal in price action.
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In particular, on this chart an engulfing
pattern forming right on key level could be
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a sign that price is ready to turn.
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For additional confirmation, you can apply
technical indicators such as stochastic or
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MACD to determine if itâs a good time to
enter a trade or not.
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Take note though that using too many technical
indicators doesnât necessarily improve their
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reliability.
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In fact, too much indicators might lead to
an extremely cautious trading strategy that
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misses out on several valid trade signals.
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3.
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Pullback to a moving average
Markets have a tendency to retrace to the
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mean or average price, which you can see by
putting a moving average on your charts.
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Moving averages are useful for identifying
and confirming support and resistance levels.
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Most S/R levels, like market highs and lows,
pivot points, round numbers etc.
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Are static levels.
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Moving averages offer dynamic zones of support
and resistance because are changing depending
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on recent price action.
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On this daily chart we added a 20 EMA, a short-term
moving average to identify the trend.
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A simple EMA could be considered as a dynamic
area of support or resistance but also the
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area between two exponential moving averages
could also be considered as a dynamic area
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of support or resistance.
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When price retraces back to this area you
should watch closely for price action signals
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forming there to get a high-probability entry
and get in on a trending market.
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Using candlestick patterns with a moving average
helps to clarify the trend.
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It also helps you to evaluate the pullback
pattern better.
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Hence, combining candlestick patterns with
a moving average is a simple yet effective
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approach for trading pullbacks.
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This is EUR/JPY on the daily chart.
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We have a pin bar right on the 20-period EMA,
a high probability pullback trade.
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So, start paying attention to price action
patterns around moving averages.
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4.
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Pullbacks to the 50% - 61.8% Fibonacci area
Price has a tendency to retrace approximately
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50% of any major move and often times even
short-term moves.
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This is a well-documented phenomenon and if
you look at any chart you can see it happens,
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a lot.
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Hence, you can watch for pull backs to these
50% areas as they will very often be high
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probability levels for price to move beyond,
and as a result, price moves back in the direction
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of the initial move from that 50% level.
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It doesnât happen every time of course,
but it happens often enough to make it a critical
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tool in your pullback trading tool box.
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I prefer to pay an extra attention to the
50%-61.8% fib area of a move, and look to
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trade entries.
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This chart shows the 4hour activity on the
pound dollar.
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This is the first strong upswing after a downwards
move.
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We drew the 50% and 61.8% retracement levels
of the bullish thrust.
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The area between them is the retracement zone.
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This sharp retracement down found support
at the retracement zone.
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The candlesticks that followed confirmed the
bullish pressure.
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As you can see we had 2 pullbacks, unable
to break below the 50% and 61.8% retracement
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area.
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You can use trend line breakouts for your
pullback entry, or search for obvious candlestick
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patterns, or even entries based on oscillators
or indicators.
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Trading pullbacks in a trending market is
one of the most efficient trading strategies
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out there.
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The beauty of a pullback trading system is
that you enter the market or place your first
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trade only after confirming which way the
market is going.
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Doing this is going to help you eliminate
entering the market with a false signal.
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Since most markets remain within a range bound
or consolidation phase most of the time, and
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the market trends only about 20 to 30 percent
of the time, finding an established trend
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to trade pullbacks can be a challenging task.
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As a trader when you are trying to apply a
pullback strategy, you need to act like a
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sniper.
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You need to wait and have discipline and patience
before pulling the trigger.
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Also, very important, you need to make sure
that you have identified the correct turning
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point, where the pullback move is likely to
end.
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Itâs your job to find a way to generate
a high probability pullback signal where the
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price is likely to resume the prevailing trend.
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If you can successfully do this, you can buy
low during an uptrend and sell high during
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a downtrend, and this can only bring profits
in the long run.
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Until next time.
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