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Pullback Trading: Definition, Strategy and Risk Factors

18 Oct 2023

The volatility of the share market is infamous all over the world. Even an experienced trader can't predict the market's movement with complete surety. Moreover, this volatile nature of the market is why you get to see trends like pullbacks. Pullbacks are among the most often occurring phenomena with the opportunity to earn money. In this blog, you'll understand what exactly a pullback is and the strategy to use during pullbacks.

What is a pullback?

A pullback is a temporary trend-reversal situation. It occurs due to a price correction. It creates a short-term trend reversal, which gives an opportunity to make a profit using a pullback strategy. A pullback may look like a trend reversal initially. But, it gets clear when the instrument's price gets corrected, and the market catches its natural momentum.

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The reasons for a pullback can be a profit-keeping, buying-selling imbalance, a temporary shift in the market's sentiments, and many more. Moreover, identifying a pullback requires market research, following trend patterns, determining moving averages, etc.

What is a pullback trading strategy?

A pullback can happen in both an uptrend and a downtrend, so it's essential to devise a strategy accordingly. Here is how you can create a pullback trading strategy if you spot a pullback.

  • The first step is determining whether the pullback will be an uptrend or a downtrend.
  • Now, you will have to wait for the pullback to happen. Once pullback starts, be ready to identify its end based on research or candlestick patterns.
  • Now, make a trade according to the situation. If the pullback is an uptrend, it is considered a buying opportunity. So you can buy when the price returns to the predetermined level, and your profit objective can be the resistance level.
  • However, if the pullback is a downtrend, it is said to be a selling or short-selling opportunity. So, again, wait for the prices to reach the predetermined level and enter the trade as a short transaction. You can set the support level as your profit objective.

Risks associated with the pullback trading strategy

The risks involved in the pullback trading strategy are:

  • A pullback can also be false, resulting in a direct loss since you entered the trend, thinking it is a pullback, but it turns out to be a trend reversal.
  • A delay in entry in a pullback can lead to a loss-making situation.

Final Words

A pullback is a great opportunity to make money in trading. However, you must be correct and fast to identify the pullback and enter the trade. Otherwise, there can be a loss if you identify a false pullback. Open your Demat Account with Motilal Oswal and get a chance to be ahead of others with the best trading experience ever.

 

Related Articles:  What is Range Trading: Principles and Technique | Mastering Market Dynamics with the Williams R Indicator | Turtle Trading: A Comprehensive Guide

 

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