Occasionally, you will encounter the term “pullback” when reading about analytic outlooks on price movement. You can trade against the trend using pullbacks in many trading strategies.
Do you think it is a wrong concept since theory often teaches to follow the primary trend? You must know about a pullback strategy and how traders can use it in Forex to know this. Read on to learn more about them.
What is Pullback?
From looking at a chart, you know that an asset won’t move straight up and down. Instead, the price will fluctuate within a trend. Pullbacks indicate a downward trend.
The explanation above should already explain what a pullback is, but if you’d prefer a definition, here it is. Pullbacks are short-term movements counter to the primary trend.
What are the reasons for Pullbacks?
During a bullish trend, pullbacks occur when the traded asset is depreciated or appreciated. Conversely, in a downward trend, pullbacks occur because market events cause a short-term asset appreciation.
How can you trade a Pullback strategy?
It is possible to enter the market at a better price when you pull back. Look for candlestick patterns and technical indicators to confirm a pullback before entering the market.
Triggers for Pullback
Pullbacks are considered pauses in the primary trend. When the price moves downtrend, the bulls control the price quickly. In contrast, the bears hold it when the cost is an uptrend. The price can change direction for several reasons. Fundamental analysis can help you anticipate a pullback.
We can see news that signals a currency weakening if we speak about Forex. In addition, events mentioned in the economic calendar may also affect a currency.
Benefits and Disadvantages of Pullback strategy
Beginners should avoid pulling back because it is a complicated pattern with more disadvantages.
Benefits
- – Conditions are better. Pullbacks are opportunities for traders to buy at a lower price when the market is up and sell at a higher price when the market is down.
- – Suppose that you miss the start of the market’s uptrend, but you still want to make a move. Prices move upward while the market is trending upward. Each time a market peak occurs, your chance of buying at a reasonable price drops.
- – However, on the flip side, a pullback provides an opportunity to obtain a lower price.
Drawbacks
- – It is not easy to differentiate between reversal or pullback. In addition, the forex market is not easy to understand for newcomers, especially if they don’t know what they’re looking at.
- – Assume that you expect the trend to continue, and you keep your trade open as the market turns down. However, you suffer significant losses as a result of a trend reversal.
- – Predictability is difficult. It’s hard to predict when a pullback will begin and end. However, the trend can quickly resume when a pullback begins.
Bottom line
Ultimately, it cannot be obvious to trade using a pullback strategy. Predicting and distinguishing it from a trend reversal is difficult. For that reason, pullback trading should be practiced before entering the real market.
