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A Pullback: Trade Against a Trend


Written by Tom Tragett  Lead Writer and Analyst at Libertex Group Tom Tragett

Reading analytical outlooks on the price movements, you might be met with the word “pullback”. Many trading strategies are based on a pullback action. Pullbacks allow you to trade against the trend. Do you think that it’s wrong as the theory teaches you to follow the primary trend? What is a pullback actually? Keep reading to learn about tricky pullbacks.

Pullback: Definition

If you are familiar with a price chart, you know that an asset never goes straight. It moves up and down even within trends. Look at the image below. We have a strong uptrend. Every time the price goes down, it’s a pullback.

USD/JPY H4 Chart

A pullback is a short-term price movement against the primary trend.

You should already be able to catch the pullback meaning from the explanation above. Simply stated, a pullback is a movement against the primary trend for a short period of time.

Triggers of Pullbacks

We can say that a pullback is a pause of the primary trend. It means that bulls in a downtrend and bears in an uptrend take control over the price for a while. There can be several reasons why the price changes its direction. To predict a pullback, you should learn about fundamental analysis. 

Pullbacks occur due to a change in market sentiment. 

Pullbacks: Real Examples 

To predict pullbacks, you should know how to analyze price movements. Let’s consider a real example of a pullback. Pullbacks occur not only on currency charts, but on the chart of any financial asset. Consider an example of a pullback stock trading. It’s a four-hour chart of Apple stocks. As you can see a pullback may also happen in the downtrend. Moreover, during a pullback candlesticks can break above resistance or below support, but later return. 

Apple stocks H4 Chart

Pullbacks: Benefits and Drawbacks 

A pullback is a complicated pattern that has more disadvantages, especially for a beginner trader. 

Benefits

Drawbacks

Better conditions. A pullback allows traders to buy at a lower price in an uptrend and sell at a higher price during a downtrend. 

Imagine you couldn’t catch the beginning of the uptrend but still would like to enter the market. The price moves up in the upward trend; thus, every time the peak is formed, your chances to buy at an appropriate price reduces. 

However, when a pullback happens, you get an opportunity to get a lower price. 

Pullback or reversal? It’s not easy to determine whether it’s a pullback or a reversal, especially for newbies in the Forex market. 

Imagine you thought the market turned down for a short-term and kept your trade open expecting the trend will continue. 

However, it was a trend reversal, and you suffered significant losses. 

Difficult to predict. It’s hard to predict the beginning of the pullback and its end. You can easily miss the point when the trend resumes. 

Why to trade with Libertex?

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