How to make a pullback in my trading?
The pullback is an element of technical analysis of great relevance. When we observe this pattern, it confirms a movement in the change of trend after the previous break of a support, resistance or trend line.
This can appear in the stock market in both bull and bear markets when support, resistance or trend lines are breached. When this occurs, a change in trend is likely to occur and the appearance of this pattern is confirmation that this is indeed going to happen. However, the break of such support, resistance or trendline does not imply the occurrence of a pullback.
Pullbacks are a retracement of the price back to the previous support, resistance or trendline after these levels have been broken. The following chart shows how the price breaks the uptrend line and then approaches it (red circle) from below to pull back down.
Pullbacks usually appear after the formation of a figure such as a Shoulder-Head-Shoulder, triangles, rectangles, etc.; validating the price movement after the figure has been broken.
Volume is also important in knowing if a pullback is forming. When the pullback is forming with a volume lower than the volume of the breakout, everything seems to indicate that the pullback is indeed going to form and the change of trend will finally occur in order to enter the market and take a pinch of money. However, like any figure of technical analysis, pullbacks confirm the trend change with a certain probability and in no case are 100% reliable.
Pullbacks can be used in all markets (Forex, Stocks or Futures) to take short positions when a support or uptrend line is pierced. In the same way, pullbacks can indicate the opening of long positions after a resistance or downtrend line is pierced.
How to trade a Pullback?
A pullback occurs when the price breaks a trend line and before turning definitively in the opposite direction it moves back towards the previous trend line making a retracement.
Let’s look at an example where the trigger pattern is a pullback. In this case, we will wait for the appearance of a pullback in the previously determined confluence area. This pullback pattern will trigger our entry, allowing us to take the position and join the trend on one of its pullbacks to make money.
The following image shows a practical case on the USDJPY price chart.
As shown in the image above, the pullback pattern allows us, in addition to triggering our entry, to determine the stop and entry point. However, before entering the market we still need to evaluate the risk/reward ratio before deciding if we can take this position. Once the risk (stop loss size) is known, to calculate the risk/reward ratio we need to estimate the target profit.
It is very important to keep in mind that obtaining positive results in the application of the method requires following all the steps (analysis) and taking only those entries that really scrupulously comply with all the requirements and movement.