Pullback forex trading

Day Trading Strategies - Pullback Day Trading Strategy.

Pullback Day Trading.

A stock you follow takes off and trends up or down sharply. But you miss your trade entry and watch in frustration as it clears one hurdle after another. Finally it stops and reverses. As it pulls back on your 5-minute chart and Level II screen, you have to decide whether or not to join and trade the action.

Predicting price movement when an intraday trend pulls back requires both skill and patience. Some corrections persist or roll over into ranges that empty trading accounts. But others quickly bounce and take off to new highs. How can you tell which outcome is more likely?

The first pullback from a breakout has high odds of rapidly ejecting in the direction of the new trend. But watch the depth of the correction. If it breaks through several minor support levels before reversing, sellers will likely emerge when price tests the short term high. This common scenario will still produce good trades. With enough reward between your entry and the short-term high, you can place a sell order 1/16th or 1/8th below the top and ride the bounce into a quick fill.

Use a 6-Out rule to measure trend pullbacks. Start your count with the first bar lower than the parabolic extension of the trend. Watch for a pullback at the same angle as the trend itself or in a tight sideways pattern. The next trend leg should begin no later than the 6th congestion bar.

Why does this work? Many day traders set their short-term chart indicators to periods that measure 5 to 8 price bars. 6 bar corrections will often reflect short-term support at these common settings. If price does not eject, the next bar can signal a trend change and trigger waves of reflex selling by this fast-finger crowd.

Keep in mind that markets often move in 1-2-3 patterns. Countertrends follow a natural tendency to pullback, bounce and then pullback again before finding support. Traders often fool themselves by jumping on the first bounce rather than waiting for the corrective move to unwind. The deeper a stock corrects, the less likely it will take out the old trend high and break into another wave. For this reason, only tight and small 1-2-3 patterns signal new trend movement.

Use a short-term oscillator, such as Stochastics, to measure an intraday rally's duration. After each price thrust, odds decrease that the trend will continue. Oscillators measure the depth of this overbought condition and provide early warning when a pullback lasts too long. Set these indicators to watch the same signals that other traders use to make their decisions. Then plan your trades to step in front of their reactions.

Pullback Support.

Moving averages and Bollinger Bands measure how far price should pull back before reversing in the direction of the trend. Notice how this NXTL intraday trend repeatedly bounces at the 8 bar MA. Trends tend to find support at similar levels on each correction. Use Moving Average Rainbows to identify the right settings for each unique pattern.

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Top Strategies For Mastering Pullback Trading (MSFT, JNS)

Pullbacks generate all sorts of trading opportunities after an active trend thrusts higher or lower but profiting with this classic strategy is harder than it looks. For starters, the security you just bought on the dips or sold short into resistance can keep on going, forcing your position into a sizable loss, or it can just sit there gathering dust while you miss out on a dozen other trades. So what skills are needed to book reliable profits with pullback strategies, how aggressively should those profits be taken and how do you admit you are wrong without breaking the bank? (for related reading, refer to Trading Opportunities on Short-Term Pullbacks )

Let’s outline the most favorable technical conditions for a pullback to turn on a dime as soon as you take risk in the opposite direction. First, you need a strong trend so that other pullback players will be lined up right behind you, ready to jump in and turn your idea into a reliable profit. Securities lifting to new highs or dumping to new lows fulfill this requirement after they push well beyond a notable breakout or breakdown level. Vertical action into a peak or trough is also needed for consistent profits, especially on higher-than-normal volume, because it encourages rapid price movement after you get positioned. It is also best when the trending security turns quickly after topping or bottoming out, without building a sizable consolidation or trading range. This is needed because the intervening range will undermine the profit potential during the subsequent bounce or rollover (for related reading, refer to The Anatomy Of Trading Breakouts ).

Microsoft (MSFT) builds a three-month trading range below 42 and breaks out on above average volume in July, rising vertically to 45.73. It pauses for a week and sells off, giving up nearly 50% of the prior uptrend, and comes into strong support at the breakout level and 50-day EMA. A midday turnaround prints a small doji candlestick (red circle), signaling a reversal, which gathers momentum a few days later, lifting more than 2 points into a test of the prior high. The stock then resumes its strong uptrend, printing a series of multi-year highs. (for additional reading, refer to Candlesticks Light The Way To Logical Trading )

Finding The Perfect Entry Price.

Look for cross-verification once the pullback is in motion. This term denotes narrow price zones where several types of support or resistance line up, favoring a rapid reversal and a strong thrust in the direction of the primary trend. The odds for a bounce or rollover increase when this zone is tightly compressed and diverse kinds of support or resistance line up perfectly. For example, a selloff to a breakout through horizontal highs that also aligns with a key Fibonacci retracement and an intermediate moving average, such as the 50-day EMA, raises the odds significantly for a successful pullback trade. Even so, you can enter pullbacks in less advantageous circumstances by scaling into conflicting price levels, treating support and resistance as bands of price activity rather than thin lines.(for related reading, refer to Strategies For Trading Fibonacci Retracements )

Janus Capital Group (JNS) carves out a 9-month trading range with resistance at 13 and goes vertical in a heavy volume breakout after a well-known hedge fund manager joins the company. The news posts a huge one-day gain, giving way to an immediate pullback that lands on new support at the top of the range, now perfectly aligned with the 62% Fibonacci retracement and 50-day EMA. The stock turns on a dime, jumping back above 15 and resuming the uptrend at a slower pace. It prints a six-year high two months later.

Taking Opportunistic Profits.

Take profits aggressively after trade entry or scale out, pocketing cash as the security recovers lost ground. Customize risk management to the specifics of that retracement pattern by placing Fibonacci grids over a) the last wave of the primary trend and b) the entire pullback wave. This combination can reveal harmonic price levels where the two grids line up, pointing to hidden barriers. Gaps and small trading ranges also need to be watched for counterswings because pullback plays always carry the risk of printing lower highs in uptrends and higher lows in downtrend. In most cases, the best exits will occur when price moves rapidly in your direction into an obvious barrier, including the last major swing high in an uptrend or swing low in a downtrend (for related reading, refer to Introduction To Swing Charting ).

Marathon Oil (MRO) breaks 19-month support at 31 in November, in sympathy with declining crude oil prices. The high volume decline bottoms at 24.28 a few weeks later, giving way to a pullback that stalls at the 38% Fibonacci selloff retracement and setting up a low risk short sale pullback entry. A second retracement grid placed over the pullback wave assists trade management, picking out natural zones where the downtrend might stall or reverse. The bull hammer reversal at the 78.6% retracement in January (red circle) warned that short sellers could be targeted, favoring a rapid exit to protect profits.

Effective Stop Loss Strategies.

Losing trades with pullback plays tend to occur for one of three reasons. First, you miscalculate the extent of the countertrend wave and enter too early. Second, you enter at the perfect price but the countertrend keeps on going, breaking the logical mathematics that set off your entry signals. Third, the bounce or rollover gets underway but then aborts, crossing through the entry price because your risk management strategy failed. The final case is the easiest to manage. Place a trailing stop behind your position as soon as it moves in your favor and adjust it as the profit increases.

The stop needed when you first enter the position is directly related to the price chosen for entry. As you gain experience, you will notice that many pullbacks show logical entries at several levels. The longer you wait and the deeper it goes without breaking the technicals, the easier it is to place a stop just a few ticks or cents behind a significant cross-verification level. You will miss perfect reversals at intermediate levels with a deep entry strategy but it will also produce the largest profits and smallest losses. If you choose to take many shots at intermediate levels, the position size needs to be reduced and stops placed at arbitrary loss levels such as 25- to 50-cent exposure on a blue chip and one - to two-dollar exposure on a high beta stock such as a junior biotech or China play.

JC Penney (JCP) breaks out above a 9-month trendline and rallies to a 52-week high at 11.31. It turns lower in mid-September after carving a three-week trading range and lands on triple support at the trendline, 50- and 200-day EMAs. The stock bounces just under support, drawing in dip buyers but the recovery wave stalls, triggering a failed breakout. A pullback play taken on the bounce requires a stop loss below that session’s low (red line) because price action into that level will flash all sorts of sell signals.

Breakouts and breakdowns often return to contested levels, testing new support or resistance after the initial trend wave runs out of steam. Pullback positions taken close to these price levels show excellent reward to risk profiles that support a wide variety of swing trading strategies (for additional reading, refer to Introduction To Swing Trading ).

How to trade forex pullback patterns.

Pullback patterns are a frequent occurrence in forex markets which means there are plenty of opportunities to be had if you are able to spot them. Unfortunately however, they are not always as easy to trade as they are to spot.

Usually a pullback can be described whenever a market falls by a fair amount from its recent peak but not enough to indicate a reversal or market crash. Indeed, pullbacks tend to be quite small moves from around 5-25% and usually offer a good chance to get aboard the prevailing trend. (Any more than 25% and a pullback begins to look more like a reversal or a crash event).

In fact, whenever a market is in a trend and the price pulls back, it is always tempting for a trader to jump in on the opportunity and try and join the trend, however, the trader must always be weary that the pullback does not indeed turn into a major trend change.

Although market pullbacks can occur as a result of different factors, they often show themselves during periods of low market volume. In these situations, a pullback can sometimes be off putting since the market is falling for no fundamental reason. However, these are often excellent opportunities to join the recent trend, especially if you were unlucky enough to have missed it the first time round.

When there is low volume in the markets, liquidity dries up, which means the price can fall or rise more easily – as it takes less money to push the price to new levels. These are generally great opportunities for pullback traders as the trend is still intact but the market has simply come down to a better level for entry.

Some pullbacks will occur over very short periods so it is important to understand the timeframe you are using and trade accordingly.

For example, if you are looking at a 5 minute chart, it is not uncommon to see the price pull back 20-30% in a matter of seconds. This could offer a good opportunity for a quick pullback trade but you must always be weary of the longer time frames. For example, a small pullback in a 5 min chart could be the start of a much bigger pullback on an hourly chart. It may even be part of a longer term correction.

It therefore always makes sense to check different charts over different timeframes before entering a position. It also makes sense to keep your trade durations relevant to the timeframe that you are watching. For example if you are trading a pull back on a 5 minute chart, try not to hold your trade for any longer than an hour. Similarly if you are looking at a daily chart, you do not want to wait much more than 8-10 days. If the market has not started to move up to where you hoped it would by this point, then it likely never will.

About Author.

Use of trend lines is a useful way of determining the optimal entry and exit level for a trade. There are some powerful analysis tools available to help you trade successfully.

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3-Bar Pullback Forex Trading Strategy.

The 3-Bar pullback forex trading strategy is an fx trading strategy that is easy to identify by almost anyone. It forms a series of three consecutive bearish or bullish bars for bullish and bearish pullback respectively. The strategy is easy to adopt by newbies and advanced traders alike.

MetaTrader4 Indicators: 123ForexPatterns. ex4 (default setting), RSIFilter. ex4 + RSI. ex4 (default settings)

Preferred Time Frame(s): Any.

Recommended Trading Sessions: Any.

Currency Pairs: Any.

Buy Trade Example (Click the picture for full size view)

Place a buy entry in the market if the following rules or conditions holds true:

If the 3-Bar pullback patterns forms 3 consecutive bearish bars within a trending market, it implies a bullish pullback is looming i. e. a buy signal. If price breaks above the blue line of the 123ForexPatterns custom indicator, it is a signal to buy. The blue RSI (14) custom indicator line should break above the 50.0000 level (the region that holds the orange bars of the RSIFilter custom indicator), while the RSIFilter custom indicator forms orange bars above its 50.0000 level, this indicates that price is being pressured higher – an indication to go LONG.

Stop Loss for Buy Entry: Place stop loss below the most recent support level.

Exit Strategy/Take Profit for Buy Entry.

Exit or take profit on position(s) if the following chart or indicator patterns holds true:

If a bearish reversal pattern forms during the bullish trend i. e. doji or refer to other price action strategies on this section, it is therefore a trigger to exit or take profit accordingly. If price breaks below the red line of the 123ForexPatterns custom indicator, it is a trigger to exit or take profit. If the blue line of the RSI (14) MT4 indicator breaks below the 50.0000 level as shown on Fig. 1.0, or the RSIFilter MT4 indicator forms SkyBlue bars below the 50.0000, it is an indication to exit or take profit on position(s) entered.

Enter a sell if the following rules or conditions holds:

If three consecutive bullish bars form a bearish pullback pattern as shown on fig. 1.1, a bears a market is in place. If price breaks or trades below the red line of 123ForexPatterns custom indicator, a sell signal is in place. If the blue line of the RSI (14) MT4 indicator breaks below the 50.0000 level, while the RSIFilter MT4 indicator also forms SkyBlue bars below the 50.0000 level as well, it is a signal to sell.

Stop Loss for Sell Entry: Place stop loss above the most recent resistance level.

Exit Strategy/Take Profit for Sell Entry.

Exit or take profit on position(s) if the following chart or indicator patterns are in display:

If a trend reversal candlestick pattern forms (refer to other price other strategies on this section), it is a trigger to exit or take profit on position(s). If price breaks above the blue line of the 123ForexPatterns custom indicator, an exit or take profit is appropriate. If the SkyBlue line of the RSI (14) MT4 indicator breaks above the 50.0000 level, while the RSIFilter custom indicator forms orange bars above the 50.0000, it is a trigger to exit or take profit.

About The Trading Indicators.

The 3-Bar Pullback price action pattern is a series of three bullish bars (for bearish pullback pattern) or a series of three bearish bars (for bullish pullback pattern that can be pinpointed on any chart.

The 123ForexPatterns custom indicator plots support and resistance level on the activity chart via its blue and red lines respectively.

The RSI and RSIFilter custom indicator are derives for the RSI MT4 indicator and are bother plotted within the same indicator window, to offer a line signal or bar signal, usually oscillating between 0 and 100. When aligned above or below the 50.0000 mid-point level, it is said to be bullish or bearish inclined respectively.

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