a simple pullback strategy that will change the way you
trade so let's start with the basics what is a pullback exactly a pullback is
simply a correction that happens in an existing trend and so why is it so
important to understand let me give you a scenario let's say that the current
market is on an uptrend and you're looking to enter a buy position now if
you're an experienced trader you would know that it's quite rare for a trend to
move in a continuous upward direction most trends will actually look like this
where the price is making a series of higher highs and pullbacks and so if you
took a position when the price is making higher highs there's a chance that a
pullback or even a trend reversal might happen so instead of taking that risk
it's safer to wait for the trend to make a pullback before entering a position
this way you are essentially buying the trend at a lower risk
now I know what you're thinking but how would I know that
the pullback will end here and not just continue downwards well based on my
research I actually discovered three common levels where pullback usually ends
and the first level is support and resistance let me show you an example over
to the left, we saw the price rejected this level multiple times which makes
this an area of resistance next the price broke out of the resistance and made
a pullback notice where the pullback ended the previous resistance now turned
support and then we saw the price went up even more and made a pullback once
again and where did the pullback ended the previous resistance
now turn support the same concept also applies for
downtrends as well moving on the next level where the market tends to pull back
into is the trend line so in this chart, we spotted a downtrend and so we can
place a trend line above here because price rejected it multiple times now
notice that the price made a pullback towards the trend line and went down
pulled back towards the trend line and went down so that was an example of the
price pulling back towards a trend line another level where the market can
possibly pull back into is the moving average here we spotted an uptrend and so
we can apply the 50 period moving average as our key level now remember for
this specific example we are using the 50 period because
that's what the market is reacting to in the past markets can also react to
other periods like the 20 100 and 200 period so you need to adjust depending on
what the market is reacting to and as you can see the price made a pullback
towards the moving average and traded higher pull back towards the moving
average and traded higher and that was an example of the price pulling back
towards the moving average now there are also situations where you can find
multiple levels in one chart like in this example we have the 50 period moving
average applied and the price pulls back but notice that there's actually a
level of support intersecting here this is called an area of high confluence
and usually when price approaches an area of confluence there's a higher chance
that a reversal will form but keep in mind you cannot blindly enter a position
just because the price made a pullback towards the level prices can still break
through it and continue downwards and that is why you need to use other
confirmation techniques before entering a position and one of the confirmation
techniques
that we can use are candlestick patterns let me show you an
example so here's a current downtrend as prices made lower highs and lower lows
next we have the 50 period moving average applied as our key level and a
resistance line intersecting it which makes this an area of high confluence now
as price made a pullback towards the confluence you're looking to see if the
price would show some type of rejection and what we got was a candlestick
pattern in the form of a bearish engulfing pattern which is when the second
candle's body completely engulfs the previous candle so what this shows us is
that at first buyers pushed the price all the way up creating a medium-sized
green candle but then sellers stepped in and started pushing the price back
down even as far as surpassing the previous candles opening price which
indicates that there's a strong selling pressure at this area and
if you want a stronger confirmation you can wait for the
next candle to form which happens to be another big red candle so this is a
good opportunity to take a short position so let's show this again on another
chart over to the left we spotted an area of resistance as prices rejected this
level multiple times then we saw the price broke out of the resistance and made
a pullback now to confirm that the price will actually reject this level and
continue upwards you're looking to see if there's some type of rejection at
this area and what we got was another ejection candle in the form of a hammer
which is when the bottom wick is sticking out so what this tells us is that at
one point sellers tried pushing the price all the way down breaking the support
level before buyer starts coming in and pushes the price back up indicating
that there's a strong buying pressure at this key area now to further confirm
that the price will continue upwards the next candle after that was a big green
candle and so this is a good opportunity to take a long entry so to
summarize the key here is simply finding candlestick
patterns that signals rejection moving on the next confirmation technique that
you can use is called break of a trendline and this is how it works in this
chart we have a downtrend and a trendline drawn as our key level now as price
has made a pullback towards the trend line we want to confirm that the price
will actually reject this level and continue downwards we can do that by
drawing another smaller trend line right at the pullback once the price broke
out of the smaller trend line that's where you want to enter your cell position
so let's show this again in another chart here's an uptrend and we have our
trend line placed below it we also spotted a resistance line here which makes this
an area of high confluence now as price made a pullback towards
the confluence you
draw a smaller trend line above it and to confirm our signal you need to wait
for the price to break out of the smaller trend line once this happens you take
a buy position now keep in mind if you found a setup where it's not suitable to
use the trendline breakout technique don't force it instead you want to use
other confirmation techniques in this case we saw a bullish engulfing pattern
which means we're using candlestick patterns to confirm this setup that is why
it's important to master multiple confirmation techniques so that you don't
just rely on one strategy so if you found a market that doesn't support a
particular strategy you can always use the others to avoid missing trade
opportunities now moving on another confirmation technique that you can use is
with the rsi indicator but first you want to edit the rsi by going to settings
and change both of these values to 50
which creates a single line in the middle like this and this
is how the strategy works here's the usd cad with the rsi indicator applied and
as we look to the right we saw the price rejected this level multiple times
which makes this an area of resistance next the price broke out of the
resistance and made a pullback now you're looking to see whether the price will
actually reject this level and continue upwards the way you do that is by
waiting for the rsi to cross above the middle line so this will be a good long
entry let's show this again in another chart here we have a downtrend and the
rsi indicator applied then we saw price rejected this upper area multiple times
meaning we can place a trend line above it next we also have your clear level
of support which makes this an area of confluence now as price came back up to
this level we want to confirm that the price will actually reject this level
and continue downwards we do that by waiting for the rsi to cross below the
middle line so this is a good opportunity to enter a short position.