Pullback Trading Strategy: Increase Your Profits with a Plan
It’s important for every trader to learn how to trade pullbacks and earn a profit. You must have heard the phrase, “The trend is your friend” before. The most convenient way to trade in the direction of the trend is by implementing a pullback trading strategy.
Our team at Trading Strategy Guides puts a lot of focus on trend direction. As such, we developed a trend-following system.
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Trading pullbacks in trends is a basic trend-following strategy. There are many different ways to profit from trading pullbacks. In this step-by-step guide, we will show you a practical way of trading pullbacks during certain market trends.
You can profit from trading pullbacks while using all time frames. This is because a trend can show up on the five-minute chart all the way to the monthly time frame. In this regard, whether you’re a day trader or a swing trader, you can safely apply our pullback trading strategy.
Before we start covering the rules of our practical pullback trading strategy in-depth, we will first define and learn how to recognize a pullback.
Table of Contents
What Is a Pullback in Trading?
A pullback in Forex trading simply represents any price movement that is against the prevailing trend. Basically, if we’re talking about trading pullbacks in trends, we’re entering in the direction of the trend. The market has traded at a lower price.
The pros of trading pullbacks in trends are that you buy low and sell high. If we’re trading pullbacks in an uptrend, you’re buying low. If we’re selling pullbacks in a downtrend, we’re basically selling high.
The second advantage of trading pullbacks in trends is that it’s actually easier from a psychological standpoint. This is because the trend is working out for you.
Now, before we get started, let’s look at what indicator you need for the pullback trading strategy job.
The first and ONLY indicator you need is the Fibonacci retracement indicator. This indicator simply draws the Fibonacci ratios that can be used to identify potential support and resistance levels from where the price can reverse.
Check out our article on “What goes on at support and resistance areas” if you have no prior knowledge as to what this is.
When trading pullbacks in trends, the most important Fibonacci levels are 38.2%, 50%, and 61.8%. Normally, it all comes down to the strength of the trend and how far the pullback will go. Usually, the stronger the trend is, the smaller the pullback will be. In this case, it can only reach the 0.382 Fib retracement.
Now, let’s see how to trade pullbacks and how to make profits from trading pullbacks. Simply follow our pullback trading strategy.
Pullback Trading Strategy Rules for a Buying Opportunity
The power and the secret of the pullback trading strategy are all contained by the fact that we aim to trade in the direction of the trend by entering a pullback in Forex. Trading pullbacks in trends offer you the opportunity to lower your risk while maximizing your profits.
To profit from trading pullbacks, we first need to define the trend. This is so we make sure that we only trade pullbacks with the trend because this is the setups that can make us big profits.
Step #1: Identify a Bullish Trend Which a Series of Higher Highs and Higher Lows Characterize.
Identifying the direction of the trend should be a fairly easy process. The easiest method that our team at Trading Strategy Guides likes to use to identify trends is the swing high and low structure. An uptrend is defined as a series of higher highs followed by a series of higher lows.
Note: Using the higher time frame to determine the trend is essential. Regardless of the time frame you normally base your trades on. We have you covered if you’re interested in learning more about the benefits of multiple time frame analysis. Feel free to continue reading our article on trading multiple time frames.
Step #2: Switch to the 1h Time Frame and Wait for a Pullback Against the Uptrend.
After successfully identifying the trend, we can switch lower to our preferred time frame. It can literally be whatever time frame you feel more comfortable with. But, for the purpose of this pullback trading strategy, we use the 1h time frame.
Now, it’s time to bring into play the Fibonacci retracement tool. This brings us to the next step of our pullback trading strategy.
Step #3: Place Your Fibonacci Retracement Indicator Between the Last Swing, High and Low Levels, Prior to the Pullback.
Identify the most recent swing low and swing high. Place your Fibonacci retracement indicator between the two swings. If you have problems recognizing how a proper swing high and swing low level should look, read our best stochastic trading strategy.
Next, we need to figure out where we need to get into the trade. This brings us to the next step of our pullback trading strategy.
Step #4: Buy Anywhere Between 50% and 61.8% Fibonacci Retracement Area.
After you’ve placed the Fibonacci retracement mark on your chart, the area between the 50% and 61.8% Fibonacci retracement, you should buy as soon as we trade within that area. It’s up to you whether or not to buy as soon as we hit 50% or to wait for the 61.8%.
With experience, you’ll be able to fine-tune your entry and profit from trading pullbacks.
Now that we’re in a trade, it’s time to figure out where to hide our stop loss. This brings us to the next step of our pullback trading strategy.
Step #5: Place the Protective Stop Loss below the Swing Low.
The last swing low used to draw the Fibonacci retracement levels can provide us with a very attractive place to hide our protective stop loss.
A break below the last swing low will invalidate the trade, so we want to minimize our losses and get out of the trade.
To profit from trading pullbacks, we need a smart strategy to maximize the potential profit. This brings us to the next step of our pullback trading strategy.
Step #6: Take Profit Once We Break above the Previous Swing High.
In order to profit from trading pullbacks, we need a strategy for taking profits as well. In this regard, the ideal place to liquidate our position is once we make a new high.
The market never moves in a straight line. Most of the time, after we break to new highs, a pullback occurs more often than not. If you want to be in and out of the market very quickly, that’s the easiest way to profit from trading pullbacks.
Alternatively, suppose we want to maximize our profits. In that case, we can only take half of the earnings once we break new highs, and the remaining half of our position will be taken at a 100% Fibonacci extension.
Note: The graph above is an example of a BUY trade… Use the same rules but in reverse for a SELL trade. In the figure below, you can see an actual SELL trade example using our pullback trading strategy.
Summary: One of the Best Pullback Trading Strategies
Learning how to trade pullbacks in trends can be one of the most rewarding trading strategies out there. The pullback trading strategy is a time-tested profitable strategy. Moreover, the key to its high rate of success is given by the fact that we’re trading in the direction of the prevailing trend.
The way to profit from trading pullbacks is by simply buying weakness in an uptrend and selling strength in a downtrend. This is what the pullback trading strategy presented in this step-by-step guide is trying to accomplish.
Thank you for reading!
Please leave a comment below if you have any questions and are still wondering how to trade pullbacks!
Pullback Trading Strategy Video
We also made a video with the steps of this strategy, so you can bookmark this page and watch the video if you need to view this strategy again!
Pullback Trading Strategy Info-graphic Download
Interested in learning about the best Forex currency trading strategies for 2020? Make sure to read our other articles as well.
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In the Note just above the last chart it says “The above was an example of a BUY trade… Use the same rules – but in reverse – for a BUY trade.” I think you meant to say “…- for a SELL trade.”
thanks for catching that! Have a great day and we hope you learned something from this strategy.
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