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The Power of the Pull Back Forex Trading Strategy

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The Power of the Pull Back Forex Trading Strategy 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. -------------------------------------------------------------------------------------------------------------------------- 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 the best price action based fully automated trading MT4 indicators: 1. 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 2. 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 ------------------------------------------------------------------------------------------------------------ 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.
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