If you wan’t to learn how to trade pullbacks, this post will help you understand and give you examples of pullback trading.
There are two main types of pullbacks:
- a pullback in an uptrend
- and a pullback in a downtrend.
Let me discuss each of these two pullbacks in detail…
A pullback is a temporary reversal of the current trend, either up or down. You see, the price action in the forex market moves like a wave:
- in an uptrend market, you will see price continue to increase but even whilst it is increasing, there will be times when price will drop…then price rises up again going past its previous higher high.
- in a downtrend market, the same but opposite happens…price will continue to fall but there will be times when it will rise only to drop back and go down past its prior swing low (lower low).
Its this price activity that creates zones of pullbacks. This chart below will make you understand this better:
A pull back in an uptrend is when a you will see price will be going up in but loses its steam and then it falls back down temporarily…then it shoots back up again.
The price level or zone where it starts reversing and going back up is called the pullback zone:
Here an example of how you can trade pullbacks in an up trend:
A pull back in a downtrend happens when price will go up and then starts to fall down again.
The price level or zone where it starts reversing and going back down is called the pullback zone:
I can only think of 3 main advantages of trading pullbacks and these are:
- you enter trades when the market is about to take off in the direction of the main trade.
- tight stop loss with less chance of getting stopped out prematurely
- tight stop loss means your risk:reward ratio increases which is a good thing.
If you think of other’s let me know.
Don’t forget to check out the rest of the forex trading strategies on this site, there are lots of trading systems that are built upon the pullback idea.