Pullback is a common term that every trader is familiar with. This is the phenomenon in which prices in the market move opposite to the main trend. Reflecting the psychology of current investors, Pullback is an important indicator that helps evaluate the market situation. So what exactly is what is pullback ? When did it appear? And what advantages and disadvantages does it bring? All questions will be specifically answered by Forex Trading in the next section.
what is pullback? Overview of Pullback
The pullback is a fairly common phenomenon in the forex market. When an asset has been trending upward for a long period of time. However, it suddenly drops in price in the short term (usually between 5% and 10%). This is considered a form of Pullback.
What is the term Pullback?
Pullback, is also known as the price correction phenomenon. This is a pause or moderate decline in price on the chart from the recent high. This usually happens during a continuous uptrend. It caused the previously established support level to be broken. However, Pullback usually only lasts for a short time. It usually takes a few sessions before the market returns to its old uptrend.
There are many causes of the Pullback phenomenon. Including investors’ profits and operating results of large companies. Or the political and economic situation, changes in monetary policy or technical factors. Detecting stocks in the Pullback phase at the right time can help investors take advantage of opportunities in uptrends. This provides an entry point to hold a position when other technical indicators are still showing bullish signals.
What is the sign of what is pullback?
There are a number of signs to help identify the Pullback phenomenon:
- Trading volume: Usually when stock prices decrease, trading volume will also decrease. However, if the price decrease comes with an increase in trading volume. This could be a sign that prices could continue to fall.
- News related to stocks: Investors should closely monitor market performance. If the company is having difficulties in business operations, or has poor business reports, leading to a drop in stock price, then it is not a Pullback. However, information and events related to the business can affect whether the stock price recovers or not. This depends on the magnitude of the event.
- Market analysis: Traders often pay attention to fluctuations in the last trading day. This helps evaluate the cause of the Pullback phenomenon. Although the stock price may seem attractive, through proper analysis a trader can predict whether the price will continue to decline or not. However, it is important to ensure that the previous uptrend is clearly identified.
In addition to learning what is pullback, traders need to gain more knowledge about what is atr ? This helps you evaluate and measure market price fluctuations effectively.
See more: Learn Dow theory for trading beginners
Indicators are often used to trade with Pullbacks
This is an important part of what is pricing strategy . There are several charts that can help identify the occurrence of a Pullback. It mainly relies on various indicators. Below are some commonly used indicators to identify Pullbacks:
Use MA Line to trade Pullback
Use the MA200 to determine whether the price is correcting in a Pullback or showing a reversal signal. The MA200 line is often considered a dynamic trend line. In an uptrend, the price often reaches the MA200 line and bounces up. While in a downtrend, the price often reaches this line and falls. Long-term MA lines rarely provide false signals.
Fibonacci Retracements
Fibonacci levels such as 38.2%, 50%, and 61.8% are often key trend points that can return. During the price adjustment phase, drawing Fibonacci retracement levels and waiting for the price to cross these levels can help determine when to enter a trade.
Apply RSI to Pullback trading
This indicator is used to identify overbought and oversold areas in the market. When RSI crosses level 70 and decreases or crosses level 30 and increases. This can predict a Pullback. If RSI creates a divergence with price, this could be a sign of a Pullback and not a price reversal. However, it needs to be combined with market psychology.
Use the ADX indicator in technical analysis
When ADX crosses level 25, there is usually a strong trend underway. The price correction can be considered a Pullback. To find entry points, it is often necessary to combine them with other technical indicators. For example, trend lines, MAs, support, and resistance lines.
Pivot points
Pivot points are often used to determine support and resistance levels. If the price touches the Pivot point and bounces, it could be a sign of a Pullback. However, if the price crosses the Pivot points, it may be a signal of a price reversal.
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What are effective trading strategies with what is pullback?
The key to trading Pullbacks is to detect and determine the start and end of a price correction. Or turn it into a reversal. So what is an effective trading strategy with what is pullback ? Below are popular strategies that investors can apply:
Breakout Strategy
This is one of the most popular strategies in Pullback trading. Pullback breakouts often occur at turning points in the market. This strategy often involves price breakouts of price patterns. Includes such triangles, head and shoulders, rectangles, and wedges. While using this strategy, investors need to be careful with moving the stop loss to avoid risks. Because Pullback breakouts usually happen quite often.
Horizontal Steps Strategy Horizontal integration strategy
This strategy focuses on analyzing the natural movements of stock prices and the nature of market behavior. The horizontal integration strategy is often used in conjunction with the breakout strategy. It helps investors find alternative entry points if they have missed the opportunity to enter the first order in Pullbacks close to the turning point.
This strategy is also used to adjust profits and stop losses safely after a trend. Investors often do this by waiting until a price step is completed. Adjust the stop loss based on the previous Pullback price.
Trendline trading strategy
This strategy requires the investor to identify three contact points on the chart. Although any two points can be connected, a trend line is only formed when there is a third point to connect. However, this strategy takes a long time to determine, which is a major drawback.
Pullback trading above the trend line is possible only at the points of contact. Like Tuesday, Wednesday, or Thursday. Therefore, experts often recommend combining it with other strategies. In order to avoid missing opportunities in case it takes too long to identify the trend line. When prices are in an uptrend, trendline touches are often a good time to buy.
Conversely, when the price is in a downtrend, recovery points and trend line exposure are often good times to sell or take profits.
Pullback trading strategy with MA line
Use moving averages such as MA20, MA50, or MA100. Depending on the desired trading time. Long-term MAs are often less affected by fake signals than short-term MAs. When the price is above or touching the MA line, it is often an ideal time to buy.
How to use Fibonacci to what is pullback?
Investors need to wait for the emergence of a new price trend. It is possible to draw the Fibonacci tool from the starting point to the ending point of the trend. Point C of the Fibonacci retracement is often used to determine the Pullback. Fibonacci can be combined with MA lines to increase accuracy.
The priority milestones for entering orders are usually 38.2%, 50%, and 61.8%. If these levels are broken in the short term, investors can continue to wait for the Fibonacci levels below.
Conclude
Above is information related to what is pullback and how to apply it most effectively. Forex Trading hopes that investors have a clear understanding of Pullback. From there, you can successfully apply this knowledge to make accurate trading decisions.
Frequently asked questions
Pullbacks often appear in what market conditions?
Pullbacks can appear in any market conditions. However, it is often seen in markets with strong increasing or decreasing trends.
How to recognize a Pullback happening on the chart?
Pullbacks are often detected when prices fall after a series of increases. Or increase after a series of decreases and continue in the main trend.
what is pullback and how is it different from a price reversal?
Pullback is just a short-term correction in the overall market trend. While price reversal usually only refers to a change in the main trend.
