What is Pullback trading?

Pullback trading involves entering an order when the price is reversing or going against the main trend, ie buying when the price is falling in an uptrend; or sell when the price is increasing in a downtrend.

A pullback can cause the price to return to previous support, a moving average or a Fibonacci ratio line, or a previous resistance breaking down into support. A pullback is a short-term wave in a trend, counter-trend, and is usually shorter in length than major waves.

Sometimes a normal pullback wave can be so strong that it makes you think a market is reversing, so you have to learn to distinguish a corrective wave from a reversal. The key is to watch for important price levels or use indicators to confirm whether it's a pullback or a reversal signal. A pullback, though going against the trend, is still part of the trend, and it does not break the structure. A pullback would completely break the structure of a trend: for example, creating a lower low in an uptrend, or a higher high in a downtrend. The pullback waves are usually not too strong, while the reversals are very strong and have very high volume.

Retrieval Trading - Notes for effective retraction wave trading

Trend-following trading systems need to distinguish and confirm from price action and market fluctuations in order to know what is the recovery wave and what is the correction. The system must help the trader to hold on to position or continue following the trend until confirmation of a reversal occurs.

The biggest problem with Wave Trading back then was that we were buying when the price was falling during an uptrend; or sell when the price is increasing in a downtrend. The price can be adjusted beyond our entry level and cause a stop loss. We have no way of knowing where the end of the return wave is.

Solve this problem by identifying key support and resistance, the 61.8% Fibonacci levels; 50% or 38.2%, or moving average; and ON ORDER ONLY when there are signs of a reversal at those price zones. We will wait for the price to correct to important zones and then enter when there are signs of a reversal.

For example:

In the ETSY chart, there is an uptrend when the price is consistently above the MA50, the times when the price corrects closely to the MA line is a good opportunity to enter the trend direction. But now, the price has penetrated and closed below MA, so it should confirm the temporary uptrend (not sure to reverse).