If you have been trading in the stock markets, crypto, etc. for a while, you know that trading with trends can be quite rewarding at times. However, trading trends on their own might not always be the best option. Markets tend to oscillate, which means that prices move up and down before continuing their trend. This is where pullback trading comes in, a strategy that involves trading against the trend.
What is a pullback in trading?
A pullback is a temporary reversal in the direction of an underlying trend. For instance, if the price of a stock is trending upwards, a pullback is a temporary decline in the price before it continues with its upward trend. The idea behind pullback trading is to buy into a stock during a temporary dip in price, with the expectation that the stock will continue with its upward trend after the pullback.
How to trade with pullbacks?
When trading with pullbacks, you first need to identify when the stock is in a pullback. One way of doing this is by using technical indicators. A good example of a technical indicator that can help you identify pullbacks is the Relative Strength Index (RSI). The RSI measures the strength of a stock's price action. When the RSI is below a certain level, say 30, it indicates that the stock is oversold and could experience a pullback soon. You can then take advantage of the temporary dip in price to buy the stock.
Differences between pullback and throwback
Definition
- Pullback: Pullback as we’ve seen, refers to a temporary decline in price within an ongoing trend. It represents a retracement of the recent upward or downward movement before the price continues in the same direction.
- Throwback: A throwback occurs when the price briefly retraces back to a previously broken support or resistance level, which now acts as the opposite (support or resistance) level.
Purpose
- Pullback: Pullbacks provide a chance for traders to enter a trade in the direction of the prevailing trend at a more favorable price. They are seen as a natural, healthy part of a trend.
- Throwback: Throwbacks validate the breakout of a support or resistance level by retesting it before continuing in the breakout direction. They confirm the strength of the breakout and can be considered as potential buying or selling opportunities.
Price level
- Pullback: Pullbacks can occur at any point within an ongoing trend, whether it's an uptrend or a downtrend.
- Throwback: Throwbacks specifically occur after a breakout from a significant price level or a trendline.
Timing and duration
- Pullback: Pullbacks are typically short-lived and relatively shallow, lasting for a brief period before the price resumes its trend.
- Throwback: Throwbacks can last longer than pullbacks and may involve more price retracement as they test the previously broken level.
Examples
Pullback example:
Let's say you're observing the price movement of a popular tech stock that has been in a strong uptrend. Over the past few days, the stock has seen a rapid increase in price from $100 to $120. However, during this uptrend, there is a temporary decline in the stock's price, dropping from $120 to $110. This decrease is a pullback, representing a retracement within the ongoing uptrend. Traders who identify this pullback may see it as a chance to enter a long position at a more favorable price before the stock continues its upward trajectory.
Throwback Example:
Imagine a scenario where a cryptocurrency breaks out above a significant resistance level at $10,000. Following the breakout, instead of continuing to rise, the price retraces back to the previously broken resistance level at $10,000 and bounces off it, resuming its upward movement. This retracement and subsequent bounce back from the broken resistance level is a throwback. Traders who recognize this throwback can interpret it as a confirmation of the breakout and potentially consider it as a chance to enter a long position, expecting further upward movement in the cryptocurrency's price.
Conclusion
In conclusion, understanding the concepts of pullback trading and throwbacks can be valuable for traders looking to capitalize on market trends and breakouts. While both involve retracements in price, the key difference as we've seen lies in their context and role within a trading strategy. Pullbacks occur within an ongoing trend and provide opportunities to enter trades at more favorable prices, while throwbacks validate breakouts by retesting previously broken support or resistance levels.
To truly master pullbacks and throwbacks, it is essential to receive comprehensive training and education on trading strategies. Skilling offers free webinars and other educational resources covering a wide range of trading topics . However, the best part is that you can apply your trading knowledge into practice so as to familiarize yourselves with online trading without risking real funds by using Skilling's demo account, equipped with virtual funds.
