One of the most common ways to trade financial markets is to use a pullback strategy. This simply means jumping into a market that has established a trend, and then has gone against that trend as markets typically do, forming an ebb and flow over time.
Think of it this way: if you are in an uptrend, you can’t go straight up forever. Quite often, traders will look for value in a situation like that, and when the market falls slightly after an impulsive move higher. This gives traders who may have missed out on the initial surge higher an opportunity to get involved, which they almost always will try.
Obviously, it works in both directions. So if the market is falling over the longer-term, it will occasionally have a bit of a bounce, and sellers will jump in at that point. Pullbacks happen in both up and down trends.
A multitude of tools are available
A multitude of tools are available for pullback strategies, including moving averages, Fibonacci retracement tools, support, lines, resistance lines, trendlines, round numbers, Bollinger Band indicators, and many others. What you choose to use is purely a personal choice, but there are some very common trading systems that are based upon pullbacks that I have found useful over the years.
Fibonacci retracement
One of the most common ways to play a pullback is to use a Fibonacci retracement tool on a trend. There are a handful of Fibonacci levels that seem to be more important to most traders, with the 50% and the 61.8% Fibonacci retracement level being the most desirable, perhaps followed by the 38.2% Fibonacci retracement level.
On the attached chart, you can see that the AUD/NZD pair fell from the 1.0880 region down to the 1.08 area. It bounced back towards the 1.0850 level, an area that I have a yellow circle drawn, right at the 50% Fibonacci retracement level. Sellers reentered on this pullback and continued to push lower.
Trendlines
Using a simple trend line can be an excellent way to play pullbacks as well. A well-defined trend line that lasts for several candles is a way to play the market, because so many other people are paying attention to the same thing. A trend line by its very definition defines the trend, thereby the directionality, that you should be following. On the attached AUD/CAD chart, you can see clearly that every time we bounced towards the red downtrend line, sellers came in and push the Australian dollar lower against the Canadian dollar. For several months this has been “easy money.”
