How to trade pullbacks?
Pullbacks can be traded using various methods. In this post, there would be 2 ways in which I like to trade pullbacks.
The first one is depicted on the left side. It is the orthodox way of trading pullbacks. Method includes Fibonacci retracement and exponential moving average( period 21 is what I use, you can change it according to your preference). Fibonacci levels can be drawn by selecting the Fibonacci tool, and selecting the two major swing points, in this case A and B. Once they are drawn, there will be various Fibonacci levels such as 0.236, 0.786 and others. If price takes a support(during bullish trend) or resistance(during bearish trend) at the 0.382 level or 38.2% of retracement, then the original trend is assumed to be very strong and price would usually continue the previous trend. For me, I prefer the 50% and 61.8% retracement, as price usually takes support at this zone more frequent in the market and it is pretty rare to find a stock retracing at the 38.2% level and bouncing back.Using EMA 21 and finding a sign confirming the original trend of the market, such as a bullish pin bar during an uptrend and vice versa, near the Fibonacci levels can be a great confluence of two indicators and can be taken as a confirmation to go long or short in the respective trade. At the point marked as C, this type of confluence should be found. Let's suppose you are not confident at taking trades so early and so another type of confirmation could be an upthrust candle, matching the trend( that is, a bullish upthrust when the original trend is bullish and bearish downthrust when the original trend is bearish), can be a great confirmation before taking the trade.
The second method is using fibonacci against the trend. I will use the image 2 as a reference. Instead of connecting the points D and E, in this method, you will connect points E and F, which is also the retracement part in the bigger picture of the original trend. Wait for a breakout above the 50% and 61.8% zone, then wait for a retracement towards the same Fibonacci levels and then look for confirmations as highlighted above, near the yellow zone, and then enter the trade. This method gives a little lower risk to reward as compared to the first strategy. There are some downsides to this method. First, you are entering the trade much after the first method, as in the first method you are entering when price is bouncing from the F, but in this method, you are waiting for the price to make another swing inside the original bigger swing, and then enter with a smaller pullback inside the major trend. Accuracy of this method is higher than the previous method. Risk to reward isn't in your favor as some of the reward has been lost in the form of the move from F to H. In any of the above methods, price can move in a manner similar to where the red arrows are moving, that is, price can move lower even after showing some signs of continuation of the trend. This is the risk which a trader should be willing to take or else you will miss out on the opportunities.
No one can stop you from becoming a profitable trader!
Hope I could help you improve your trading journey and make it much more simpler. Any doubts will be answered ASAP.
Grateful🙏
The first one is depicted on the left side. It is the orthodox way of trading pullbacks. Method includes Fibonacci retracement and exponential moving average( period 21 is what I use, you can change it according to your preference). Fibonacci levels can be drawn by selecting the Fibonacci tool, and selecting the two major swing points, in this case A and B. Once they are drawn, there will be various Fibonacci levels such as 0.236, 0.786 and others. If price takes a support(during bullish trend) or resistance(during bearish trend) at the 0.382 level or 38.2% of retracement, then the original trend is assumed to be very strong and price would usually continue the previous trend. For me, I prefer the 50% and 61.8% retracement, as price usually takes support at this zone more frequent in the market and it is pretty rare to find a stock retracing at the 38.2% level and bouncing back.Using EMA 21 and finding a sign confirming the original trend of the market, such as a bullish pin bar during an uptrend and vice versa, near the Fibonacci levels can be a great confluence of two indicators and can be taken as a confirmation to go long or short in the respective trade. At the point marked as C, this type of confluence should be found. Let's suppose you are not confident at taking trades so early and so another type of confirmation could be an upthrust candle, matching the trend( that is, a bullish upthrust when the original trend is bullish and bearish downthrust when the original trend is bearish), can be a great confirmation before taking the trade.
The second method is using fibonacci against the trend. I will use the image 2 as a reference. Instead of connecting the points D and E, in this method, you will connect points E and F, which is also the retracement part in the bigger picture of the original trend. Wait for a breakout above the 50% and 61.8% zone, then wait for a retracement towards the same Fibonacci levels and then look for confirmations as highlighted above, near the yellow zone, and then enter the trade. This method gives a little lower risk to reward as compared to the first strategy. There are some downsides to this method. First, you are entering the trade much after the first method, as in the first method you are entering when price is bouncing from the F, but in this method, you are waiting for the price to make another swing inside the original bigger swing, and then enter with a smaller pullback inside the major trend. Accuracy of this method is higher than the previous method. Risk to reward isn't in your favor as some of the reward has been lost in the form of the move from F to H. In any of the above methods, price can move in a manner similar to where the red arrows are moving, that is, price can move lower even after showing some signs of continuation of the trend. This is the risk which a trader should be willing to take or else you will miss out on the opportunities.
No one can stop you from becoming a profitable trader!
Hope I could help you improve your trading journey and make it much more simpler. Any doubts will be answered ASAP.
Grateful🙏
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