PullbackWhat Is Pullback Technique?


  • "Pullbacks" are often referred to as price retracements or price correction. This is a typical price movement after there has been a breakout of an important level of support or resistance.It is represented by a momentary reversal of the price towards the level that was broken before. After touching the breakout level or moving towards the zone, it goes back towardsthe initial breakout direction, thereby establishing a trend.

    Pullbacks are often considered market entry opportunities when they reverse direction above theprior breakout level. Please note that the trade or investment is to be made in a trend, i.e. in the direction of the breakout.

    Warning! It’s very important to not blindly assume that all breakout levels will result in a pullback, and to ensure that we are not experiencing a "false break" with relative price movement in the breakout direction. In order to differentiate pullbacks from false breaks, it’s necessary to observe the length of the bar (candle) that triggered thebreakout in the form of a close above a level, and the number of bars/candle sticks (length of time) from the close above the break out level to the point it either retest the level or enters the zone. If the length of the closing bar is below a preset range in pips based on historical analysis, and the number of bars above the level (duration) is short, it’s assumed to be a false break.If the breakout bar (candle stick) is long and the number of bars above the breakout level is much (long duration), it’s assumed to be a pullback.

    Examples of indicators used in identifying pullbacks are mainly mathematical based and price indicator based. The mathematical based indicators include:  Fibonacci retracement, Fibonacci Extension, and Fibonacci fan levels.  The important pullback levels in Fibonacci retracement are 38.2%, and 61.8%, while for Fibonacci Fan the most significant level is the 88.6% level as shown in the chart below. Other levels are 23.6%, 50.0%, 78.6%, 127.2%, 161.8%, 200%, 227%, 261.8%, and 423.6%.

     

    Another price derived indicator is the HeikenAshi indicator. Applying a mathematical function over this indicator helps in identifying pullback levels in the form of a Doji spotter as indicated in the chart below.

     

    False breaks could also be used as entry signals in an opposite direction when considered as an indicator as explained below. Considering a minimum of 2 consecutive bars of the same color e.g. bullish bars whereby the most recent bar closes above the previous bar. If a bearish bar occurs and closes bellow the third bar in the index, this is considered a false break as shown in the image below.

     

    • Conclusion

    Being able to identify pullbacks like in the charts above can help in identifying entry signals with sniper accuracy. Using wrong tools can also lead to a lot of false breaks, hence false signals. The importance of using the right tools cannot be over emphasized, as it further reduces the possibilities of fear of missing out.

Interviews

  • the Analyst's answer

    Jean Grossett - Financial analyst

    Though tools like Fibonacci retracement and Fibonacci fans are very useful indicators, the introduction of subjectivity when drawing the swing high and swing lows can lead to different results. It is therefore important that a trader have an understanding of the hierarchical framework  of financial time series in order to reduce the level of subjectivity when plotting the Fibonacci tool from on swing high to swing low or vice versa.

    The indicator I will suggest using is the HeikenAshiDoji spotter trend indicator, because it does not only identify pullbacks, but it also shows a clear direction of the trend.

Members Comments

  1. Profile photo gravatar of Connie Franecki
    Connie Franecki (georgette-cormier)
    says:

    A pullback technique can be traded either when the market is trending or after a breakout. When the market is in a downtrend or an uptrend, the price is making small corrections against the major trend which is called pullback. In order to recognize how much the price will pullback, the traders use some indicators, like Moving averages, support/resistance, Fibonacci, Parabolic SAR, Bollinger Bands, etc.
    When a breakout is happening after a range trading, the price will make pullback to retest the support or resistance line to check if the breakout is valid.
    Very useful instrument if you are trading pullbacks is to use some oscillator like RSI, Stochastic or something else.

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