Advantages of pullback trading
🟠 Higher potential for profitable entries. The essence of pullbacks is that, after the pullback ends, the price will continue back in the previous swing direction. Therefore, pullbacks provide a great entry opportunity, and if price action signals appear after the pullback, it further indicates a high potential for profit.
🟠 Fewer premature stop loss setups. Pullbacks make stop loss setups more flexible. You can set your stop loss further away from the potential triggering area, such as keeping it away from important price levels or moving averages.
🟠 Better risk-reward ratio. Theoretically, entering on a pullback allows you to set tighter stop losses since you are entering closer to key price levels. Tighter stop losses mean better risk-reward ratios. Of course, whether to set tighter stop losses is up to you.
🟠 Even if you do not choose tighter stop losses at this time but still opt for a normal stop loss range, the risk-reward ratio of the trade still improves somewhat. Originally, a 100-point stop loss with a 200-point profit target now turns into a 100-point stop loss with a 250-point profit target because the space already pulled back becomes part of your profit.
Different types of pullback entries
Next, let's look at some examples of different types of pullback entries:
1. Enter on a pullback without price action signals
In the chart, the price pulls back to an important level. There are no clear price action signals on the chart, but we see that the price quickly sells off at the important level. Therefore, we can identify a potential opportunity here:
2. The price pulls back to important price levels and forms a confluence point
This should be my favorite pullback trading strategy: waiting for the price to pull back to important price levels on the daily chart and then waiting for a clear price action signal to form here. I think this is the method with the highest probability of profit.
3. Pull back to the moving average (price average)
The market tends to revert to the mean, which can be observed through the moving average. The chart below shows the 21-day moving average used to observe the trend on the daily chart. If the price pulls back to this area, you should closely monitor for any price action signals that may also appear:
4. 50% area pullback
Prices tend to pull back near 50% of major swings. If you look closely at any chart, you'll find that this phenomenon occurs frequently. Therefore, we can pay attention to pullbacks near these 50% areas, as after the pullback ends, the price will continue its previous swing. Even though this phenomenon does not occur every time, its frequency is so high that it can serve as an important tool for our pullback trading.
5. Enter during the pullback in the candle chart or signal area
Another effective method to utilize pullbacks is different from the one mentioned above. I call it the 50% pin bar pullback. This means that when a pin bar with a long shadow appears, the price may pull back to the middle of this pin bar, which presents a good entry opportunity.
Wait for the price to pull back to 50% of the previous pin bar to enter, with potential profits reaching 4 times:
Wait for the price to pull back to 50% of the false pattern combination to enter, with potential profits reaching 2 times:
6. Enter when the price pulls back to the event area
The price pulls back to what I call the event area, which is a place with a very high probability of profit. In the chart below, the price pulls back to the event area shown, where the pin bar signal was formed, and then a bearish pin bar appears, indicating that the price will experience a significant drop.
I hope you now have a clearer understanding of price pullbacks and why so many traders focus on pullback trading.
Of course, there is much more content on pullback trading. This sharing mainly aims to provide basic knowledge so that you can immediately start practicing pullback trading.
Let's encourage each other!