Pullback trading is a perennial favorite among both new and experienced traders. And that’s not surprising, as looking for pullbacks ensures you stay aligned with the market. In addition, it also allows for an excellent risk-reward ratio. In this article, you will find the most popular pullback trading strategies.
Strategy 1: Pullback trading with trend lines and channels
If you like the simplicity of price action, you’ll love this strategy. With this method, you use a trend line to identify the trend of interest. Then draw a channel to capture oversold (overbought) conditions for your entry. Breaches of the bearish channels are signs of an overbought situation. These act as pullback entries.
Strategy 2: John Hill’s trend line method
John Hill’s pullback strategy uniquely uses trend lines. It uses the slope of trend lines to assess momentum, i.e., momentum during a retracement or pullback. Flatter lines indicate weaker momentum, and steeper lines indicate strong momentum.
Because of this, John Hill only gets in when the countertrend’s strength has faltered. You will find that this strategy is only used when dealing with complex pullbacks.
Strategy 3: Pullback to 50% retracement (correction)
This strategy uses the 50% retracement of a price push as support or resistance. First, identify decisive price action. Then design a retracement area (50% to 61.8%) and wait for a correction to pull back to that area. Choosing the right rate boost is critical to making it work.
Strategy 4: Moving averages
Moving averages offer a high return on investment for traders who want to focus on the essentials. A moving average is easy to understand and performs different tasks: It can identify trends and show entry opportunities. Therefore, moving averages are often found in simple trading strategies.
Strategy 5: Moving average candlestick
In this method, you will use the moving average as your support and resistance zone. This strategy is straightforward if you are already familiar with candlesticks. We need two components:
Some candlestick traders haphazardly look for formations and entries. This strategy avoids this problem by offering a systematic approach to trading candlestick patterns, so you can look for candlestick formations sparingly. Instead, only look for them when the market returns to the moving average.
Strategy 6: Weighted moving average with the Hull moving average
This impressive dual-moving average strategy comes from a popular forum thread. Two moving averages are used:
- A long-term oriented Weighted Moving Average to show the market trend.
- A Hull moving average to track price action.
We only consider setups in the direction of the weighted moving average. The higher high and higher low confirms a bullish market structure. Any close above the Hull moving average provides a long entry after a pullback. Assuming the bullish course orientation remains.
Aggressive or conservative market entries are possible depending on the price action relative to the moving averages.
Strategy 7: The Holy Grail System (ADX)
Linda Raschke’s Holy Grail Setup system uses the ADX indicator to identify a stable trend. The moving average is used for time entry.
Strategy 8: The hidden divergence of the RSI
The classic RSI divergence is geared towards trend reversal setups. The hidden divergence, on the other hand, signals trend-following trades.
- Classic: Prices make new lows – oscillator makes higher lows (reversal entry).
- Hidden: Prices make higher lows – oscillator makes lower lows (continuation entry).
According to the RSI plot, momentum has moved to the upside. However, price action has failed to develop a new swing high. This formation is a bearish hidden divergence. These can be used to precisely time a pullback entry in a downtrend.
Strategy 9: Trading ranges on the pullback with the Heiken-Ashi
The indicator in question here is the representation of the Heiken-Ashi. This runs more evenly than is the case with the usual candlestick chart. Heiken-Ashi candles might seem pretty drastic at first if you’re new to them. Still, they provide a beneficial view of price action. The basic idea of this strategy is to use Heiken-Ashi candles to find an area where the pullback could end.
Summary – Pullback Trading Strategies
All pullback strategies have the same goal: focusing on a single tightrope walk. The deeper the pullback, the better the risk/reward ratio for the pullback trader. However, a deep retracement (or correction) can also signify a weakening trend. Therefore, the crux of the matter is finding a balance that provides a positive expectation of return over the long term. Once you find this balance, you can develop a pullback trading strategy using any trading instrument.
