How To Trade Pullbacks

Updated: Nov 19

Trading Pullbacks as a swing trading strategy

One of the most common entry techniques used by swing traders is the buying of breakouts from consolidations or bases, which is the approach I take.

The next best technique is entering the pullback itself.

However, initiating a trade in a pullback is a skill that a trader develops over time. You can’t buy or sell any pullback and need to be cognizant of traits to look for while trading the pullbacks.

I created a swing trading video for those looking to learn more on the subject:

How To Trade Pullbacks

Benefits of entering in pullbacks

· Pullbacks usually lower your cost base.

· Often easier to buy the stock when the price is resting than when it’s breaking out to new highs and moving quickly.

Reversal vs Pullback

Picking up a short lesson from the Dow Theory, which states that the price has three trends:

1) Primary trend which is the long-term trend,

2) Secondary trend, which is a pullback within the primary trend and

3) Minor trends lasting for short periods, which is often simply noise.

Then there are phases in the primary trend called, accumulation, public participation, excess in an uptrend, distribution, public participation, and panic in a downtrend. Clicking on the video below will help you better understand this concept.

The most important part of trading pullbacks is to differentiate between a potential reversal (start of a downtrend) and a pullback (secondary trend), as they both look the same in the beginning.

An entry into a reversal can be quite damaging because reversals are quick, sharp, and often painful, sometimes bringing in severe account drawdowns. Pullbacks, on the other hand, are quite different than reversals and have to be skilfully analysed to not confuse reversals with pullbacks. There are traits you can look for to differentiate between the two.

A reversal of the primary trend