How to Smile All the Way To The Bank Trading Pullbacks In a Trend

Hello and welcome to another edition of the bulls vs the bears. Today we are going to learn how to smile a little bit. We are going to learn how to smile all the to the bank trading pullbacks in a trend. Trading pullbacks in a trend is one trading strategy that has stood the test of time. I can imagine somebody asking”Well, what’s so special about trading the pullback? Well just like any other strategy you make your entry in the market after confirming the direction of the trend. This way you don’t make your entry on a crazy whim and risk the market doing a nasty 360 on you.

If you want to successfully  trade the pullback you need to cultivate the mentality of a sharpshooter. Just like a sharpshooter, you wait for hours if not days for the  trade setup to take shape before pulling the trigger. Even more important you need to identify the point where the retracement move is likely to end. Because if you miss it, you miss out on a lot of cash.

So before we dive into how to trade the pullback  we are going to answer a few questions starting with:

What’s The Whole Idea Behind The PullBack Strategy?

Well the whole idea behind the pullback strategy is to buy low during the uptrend and sell high during the downtrend. You put your stop losscloser to your entry instead of placing your order in the direction of the trend.

Now before we get into illustrations of trading the pullback, there is a burning question that needs answered. And it is:

Why is The Trend The Trader’s Best Friend?

I’m sure most of you have heard the famous forex”The Trend Is Your Best Friend.” Newsflash!The trend is your only friend until it runs out of gas.

Anyways back to the main question. You see while most of the major forex players have access to all the current forex information, the forex market is pretty much in consolidation mode. Forex player pretty much take a breather trying to figure out their next moves. However things get very interesting when press releases about economic fundamentals are released. If the data differs from that of the forex market, expect to see significant price movements. Why? that’s because the forex market is trying to make sense of the new information to find a new alignment.

Now once price establishes a trend by pushing price up or down, traders start taking their profits and head for the exit. Their mindset is  price cannot for any higher or lower than it is now or they just want to save their hard earned cash. Better safe than sorry. Right?Anyways regardless of the traders, motives, they affect the trade’s momentum, causing the pullbacks that we see on the market.

There are two things you need to know about  pullbacks. First off they show up at a previous consolidation zone or pivot point on the price action chart. Second pullbacks test a previous support and resistance level. Now a lot of forex traders place their orders around this support and resistance area since they’ve seen these levels convert into pivot zones.

Consequently when a pullback of the trend touches these price levels, accompanied by market orders, the market sparks a resumption of the trend(Getting the picture now?). If the opposite happens, both support and resistance levels get breached, resulting in a deadly trend reversal.

If you are getting started as a trader I suggest you kick off with trading pullbacks rather venturing in the unknown with reverse trends. I assure you will be eaten alive trading countertrends. The good thing about trading pullbacks is that even if the price goes beyond your entry You get a second crack at a missed signal. As you get comfortable trading pullbacks you can now make the transition to more complex strategies to complement your pullback trading.

Now that we’ve identified why the trend  let’s get into how to trade pullbacka The first step is to trading pullbacks is:

Identify The Trend

Of course you should be able to identify the trend if you want to perfect the art of trading pullbacks. If the price on the left is lower than the price on the right and creating higher highs and higher lows, you have yourself an uptrend. You can’t  miss it. Y However, if the price on the left is higher than that of the right you have yourself a downtrend. You can’t miss either of the two.  can also employ the use of moving averages to confirm a trend when a crossover is in effect. You can also use the crossover to confirm a pullback resuming the prevailing trend. Let’s look at an illustration using the GBPUSD pair.GBPUSD-Moving-Average-Trend-Identification-Uptrend

The green line suggests the bulls are powering the GBP USD pair upwards. However, the addition of two moving averages  colored in red(13 EMA and 21 EMA)  confirmthe temporary momentum in the market.

Notice how the red EMA crosses the green EMA. That’s the pullback we’ve been talking about. However, the GBP ends and the uptrend resumes his journey when the red EMA crosses back above the green EMA(as indicated by the red arrow).

Now let’s look at an illustration of trading the pullback in the  downtrend  again using moving averages

GBPUSD-Moving-Average-Trend-Identification-Downtrend

We see a similar scenario in the downtrend. Just like the uptrend, red EMA crosses above the green EMA, signalling a pullback. As soon as  red EMA crosses below green EMA, it signals the end of the GBUSD pullback and the resumption of the downtrend.

Unfortunately there is one major stumbling block when using crossovers. You see, crossovers only take shape if the pullback momentum is strong, as was the case in the first scenario. The trend then resumes, leaving you acting like a deer stuck in the headlights. You start wondering whether whether to enter the market or not, which shouldn’t be the case especially if you have a solid trading edge.

Even worse, the EMA starts to lag as an indicator. Such that by the time it generatesthe signal,the market may have you buy and moved in the opposite direction of the prevailing trend.

Consequently the risk to reward ration of your trade also takes a substantial hit. In that case, you’d be better off trying to identify a potential reversal area during a pullback and using better price action analysis to place your trades.

For more information on moving averages look up We Moving Averages Parts I and II

Next up is

Identify Potential Pullback Reversal Area

Another way of trading the pullback in a prevailing trend is identifying a potential pullback reversal area. If you are familiar with support and resistance analysis you would know that old resistance turns into new support and  old support turns into new resistance. Let’s take a look at an illustration using the GBPUSD pair

Identify-Pullback-Reversal-Area

Initially GBPUSD run into strong resistance at the 1.5750 mark twice. Once price breaks through this level we witness the first pullback finding solid support at this level.. These old support levels are a convenient place to place your limit orders on the side of the prevailing trend.

Just place  your limit order a few pips above the old resistance, and you should earn yourself a decen trisk to reward ratio in the ensuing breakout. This only works if the pullback doesn’t penetrate below the pivot line.

Now let’s look at another illustration of potential pullback reversal zones using the Fibonacci retracement levels.

04-Fibonacci-Pullback

As you can see  Fibonacci retracement levels are also  very useful in identifying  potential pullback reversal areas.  Here we draw two Fibonacci retracement levels on the same uptrend at different levels using two different colors. The green colored retracement levels identify the first swing point while the red color retracement level spots the second swing point.

Notice how price pulled back to the 23.6 Fibonacci level after the first upsurge. Price then pulls back to the 38.2 retracement level after the second upswing. Price then resumes its upward climb.  When you make use of the Fibonacci tool whenever price carves a new high during aan uptrend, and a new low during the downtrend you will find that price defers to the retracement levels. Also Fibonacci levels act as support and resistance levels in disguise. You can also find confluence signals from both support and resistance levels and a Fibonacci resistance levels. And when you find these signals you have yourself a high probability setup.

For more information Fibonacci retracements look up Lighting Up Candlesticks with Fibonacci Retracements

And Finally:

Best Strategy For Entering The Market After A Pullback

One recommended strategy for entering the market after a pullback is the use of price action patterns such as a pin bar or engulfing patterns. When you find these two patterns near a previous support or resistance, or near a moving average, that is confirmation that the pullback is ending and the trend is about to resume, Let’s take a look at an illustration using the GBPUSD pair.

Price-Action-Enter-Market.-pullpack-trading

Here the moving average and the downward trendline tell us of an ongoing downtrend. Once that ‘s confirmed we then see strong resistance at the 1.5750 level as the GBPUSD pair get rejected a few times. Please do not jump into the lion’s den blindly. Just wait  for the bearish pin bar to make its appearance to tell you that the pullback has run out of steam.

The pin bar makes its entry when prices breaches below the low of the pin bar. And when that happens expect to make decent profits with minimum risk and fuss.

Understand that when trading pullbacks you are making use of the power of confluence and increasing your odds of making a profit.A combination of existing trend support and resistance, and price action patterns, cuts down your risk and increases your profits in the process

For more information on trading pullbacks  look up Trading The Pullback With Panache

That’s  a wrap for ” How to Smile All the Way To The Bank Trading Pullbacks In a Trend”  Trading pullbacks with a multiplicity of factors sets you up to trade high. However you need to a clearly defined trading trading strategy that identifies your trading edge.

Your  trading edge outlines the circumstances under which you will  enter the market. Instead of jumping into the deep end just wait for confirmation after identifying a trend and a potential reversal zone.When you sit and wait you are in absolute control of your trading situation. You decide where to place your stop loss and where to exit the trade. Do this, and you will be smiling all the way to the bank

Til next time take care

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