The Power of The Pull

Back Forex Trading

Strategy
The theory behind trading pull backs…
Everyone has heard the old cliché, “The trend is your friend until it ends”, but what exactly
does “trading with the trend” entail? It can seem vague to the inexperienced or beginning
trader.

What we need are SPECIFICS, not vague clichés that accomplish nothing (unrelated side note;
this is also what we need from politicians).

OK…so 90% of my trades are with the underlying bias of the market, in other words, I rarely
try to pick tops and bottoms. However, that doesn’t mean I don’t trade against the current
direction of the market.

For example, I may see a long-term uptrend in Crude Oil and then wait for the market to start
falling before I come in and buy the market, but I am doing that because I believe in the
underlying trend.

This is very different to top and bottom picking and it’s what professionals call “trading from
value or trading pull backs or trading retracements” (all mean the same thing).

Waiting for a pull back and trading from that pull back is a much higher probability play than
entering at the extended part of a move.

Pull backs can help lower entry point risk as we are usually trading at a key market area (value
area) that has previously shown support /resistance (depending on the direction you are
trading of course).

As we know, key levels are often major containment points and the tide can shift at these
inflection points very quickly and lead to large moves in the opposite direction (in our trade’s
favor).

To put it more succinctly, the reason why trading pull backs is so profitable, is because markets
ebb and flow, and a pull back helps you to refine your entry point so that you are entering at or
close to the turning point between the ebb and flow (again, this is not top or bottom picking
because we are not trying to predict a trend change).
You won’t always get it exactly right, but if you stick with the underlying trend or trade from a
key chart level, you can usually get close.

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Now let’s continue...

Let’s look at a chart to understand this better…

In the chart below, we have a clear downtrend in place. By the time the circled areas occurred,
it was obvious a downtrend was underway.

So, at the point of the red circled areas, experienced traders were certainly looking for pull
backs within the trend, to join the trend from a high-probability point.

Whereas, losing traders were thinking the ‘trend was extended’ and thinking it would end after
every downward swing.

As you can see, if you tried to buy near any of those low points, the market only moved up a
small distance before the trend resumed, and the MUCH bigger pay-off came if you had looked
to be a seller on the retracements higher, or a seller on strength.

Also, many traders only feel comfortable entering when the market is currently moving in the
direction they like.

So, many traders lost money because they sold right near those bottom points, when the
market looked weak, but was actually getting ready to retrace higher.

This is partially why trading gives many people trouble; because you typically must do the
opposite of what you feel like you want to do, to make money. I can assure you that selling
when this chart was retracing higher, wasn’t easy to do, because it felt like the ‘bottom was in’,
but we should trust the underlying trend, we must have faith it will resume…
Retracements: The cornerstone of a market technician
Identify trend then look for pull backs…

The primary way to trade pull backs is to look for trends and then look for pullbacks within the
trend. What you are doing here is first identifying the overall momentum of a chart; which
direction is the chart generally moving, from left to right?

This will be your path of least resistance, or the path the market is most likely to continue
moving down in the near future.

We need to remember however, that markets do not move in straight lines. So, if you have
identified an uptrend for example, it doesn’t mean the market may not move down for a day or
two or three or even a week or two, within that overall uptrend.

The thing traders forget about is the element of time. A downward pull back of 3 or 5 days, can
seem significant to the average trader who really wants to make money, but in the context of a
multi-month or multi-year uptrend, those few days are just a blip, a blip that can cause you to
lose a lot of money if you aren’t careful.

Let’s look at an example of this…

Notice in the chart below, a clear uptrend was in place. Note the minor pull backs to the
downside within the trend; these are high-probability opportunities to enter the trend.

The best entry and the most obvious, was the bullish pin bar notated on the chart; a prime
example of trading a price action signal on a pull back or “buying weakness in an uptrend” …
Identify most recent swing move and trade early retracement

Now, there are many times when the market trend is not super clear or obvious, and during
such times we can still use pull backs or retracements to our advantage.

Notice in the chart below, there was an existing uptrend, this was obvious, but then price
began to pull back, to swing lower, within that uptrend. Over the course of a few weeks, it
became evident this was a protracted pull back that could keep moving lower, yet it was not
quite clear whether the overall uptrend was over just yet. In this case, we can look for upside
retraces to get short or to sell.

Especially, after the first retrace higher got turned lower again, we would then be looking to
sell on subsequent retraces…
Trading pull backs to support / resistance levels or moving averages

We also want to focus our attention on key chart levels of support or resistance as well as
moving averages, for pull backs.

You can easily identify support and resistance levels and watch for price to pull back to them
and then either enter blindly or wait for a price action confirmation signal to enter and ‘fade’
the recent market direction into the level.

By that I mean, if the market was falling into a level, you buy at the level, and if it was rising
into the level, you sell at it, or fade it.

Moving averages are usually better in obvious trends; you can watch for smaller retracements
to the moving averages (exponential moving average or ema) and then look to join the trend
from that ema, ideally on a price action signal, but it’s not always necessary, especially in very
strong trends.

50% retraces even on intraday charts.

Pull backs provide us entry opportunities on daily as well as intraday charts. One way to look
for pull backs is to watch for 50% retracements of moves. These don’t always have to be major
moves, as we can see in the chart below.

Sometimes, there won’t be an obvious key level to watch for pull backs to, or there won’t be a
moving average, so you can also use the Fibonacci retracement tool to look for approximate
50% retracements of moves, look to get in near that 50% level.

Ideally, the market will be trending and you can watch for these 50% retracements within the
trending structure, and then re-join the overall trend direction from the 50% level.
We can see an example of this on the 4-hour chart below:

Pull backs to key levels can result in big risk reward potential

Trading pull backs can also assist in creating high risk to reward plays, especially if we are
entering from a long-term key level and using the 4 hour or 1 hour chart to pin-point an entry.
It’s not uncommon to pick up trades that exceed a risk reward of 5 to 1 and sometimes far
more.

In the chart below, we can see an example of trading a pull back to a key support level. We had
a nice pin bar buy signal to confirm our entry and notice the huge potential risk reward here.
Pullbacks to key / long-term levels often result in huge moves the other direction as price
bounces or repels from the level, creating huge potential pay offs / risk rewards:
Order types used to enter on pull backs…

Generally speaking, one can use market entry orders or limit entry orders to enter the market
after a pull back.

As discussed above, a pullback provides us with a high-probability spot to enter a market, as a

blind entry at a predetermined level with a pending limit order or on ‘confirmation’
with confluence which usually means a price action signal, which would be entered on a
market order typically.

When waiting for a pull back and TLS or confluence, we usually can use market orders when
the conditions are met.

When entering on a blind entry at an event area or similar key level, we can set a limit
‘pending’ entry order at or very near to the level.

What to do in a ‘runaway trend’ that doesn’t really pull back….

Please note, that just as great trades can be entered on pull backs, the ‘golden rule’ still
prevails; that markets move in extended trends and remain in over-extended moves for longer
than you think.

It’s those who have the guts to commit to trading in the direction of what looks like an ‘over-
extended trend’ when everybody else is running scared, that make the money.

I would ideally want to be trading pull backs and entering on retracements during these large
moves, but they don’t always come…

Sometimes we have to jump on-board the train and sometimes we must be prepared to miss
the trade if we don’t get a pull back. Markets often run further than we expect, trends last
longer than we imagine…

In these market conditions, we would ideally trade in-line with these moves but ideally enter a
trade after a pull back, but if we only applied this concept, we will miss some trades as there
won’t always be a pull back.

So, if markets don’t pull back and we miss a trade if we don’t get on board, we will kick
ourselves 50% of the time.

A solution is to read the daily chart time frame on a day-to-day basis and watch for any price
action signals which may provide entry opportunities.

Even in the absence of a pull back in prices, there are often clues that the market is likely to
continue and breakout with the trend (such as inside bar pattern trend breakout). As I have
said, price action is like reading a book from left to right; you have to know what happened on
the previous page for the current page to make sense…this is a skill mastered with education /
training, time and experience.

Conclusion
Trading pull backs not only provides you with very high-probability entry points into trends and
from levels with huge potential risk rewards, it also helps with the psychology of trading.

You can consider this yet another advantage of pull backs and another reason they are so
powerful; trading pull backs will teach you great habits.

A trader truly focused on trading pull backs must learn discipline and patience, because trading
pull backs means you aren’t just entering wherever and whenever you want.

It means you are held accountable to a set of planned scenarios that you have defined in your
trading plan and that you wait and watch for in the market.

My High Probability Automated Price Action Forex

Dashboard Indicators
Price action can be very time consuming because you need to scroll through a lot of charts
in order to identify the best possible trade setups. And often you fail!

What if you have indicators that do all the work for you in just seconds... on all pairs and all
timeframes?

Take a look at my best price action based trading indicators:

3. Forex Day Trader Signals Dashboard

The Forex Day Trader Signals Dashboard is based on price breakouts and the most
profitable price action trading patterns.

This tool is just excellent for scalping and day trading the currency market on any pair(s)
of your choice.

It scans every forex pair for high-probability day trading patterns on any time frame.

Moreover, signals do not lag because it’s based on price action only… and no lag simply
means more profits!

Click Here To Start Trading With Forex Day Trader Signals Dashboard

4. Wolfe Waves Forex Dashboard Indicator

My Wolfe Waves indicator will scan ALL currency pairs and ALL time-frames for the
highest-probability Wolfe Wave price action patterns you could ever find.

And all these calculations are done so fast – literally within seconds – you won’t even notice
the time.

Then, the indicator will display a beautiful dashboard on your chart where you can see
exactly what pattern has recently formed on EVERY pair, EVERY time-frame.
Click Here To Start Trading With the Wolfe Waves Dashboard Indicator