Trading pull backs, or retracements, can be a powerful way to enter trades that have a high probability. One of the reasons that they work so well is because they take the emotional aspect out of making trades. Instead of getting overly excited and entering the market to grab onto trends, pull back strategies force you to set up the rules for entering and then wait. Just wait. Nothing else.Instead of making the trade when the situation feels right, stick with your set of rules. By keeping your mind and emotions out of the trading scenario, you can give the pullback strategy a chance to do its stuff. Here’s how it goes and how you can make it work for you.
Trading from Value
When you wait for a pull back or retracement and then trade, you’re giving yourself a much higher probability of picking a winner than by entering the trade at the top or bottom of a trend.Think about how the market trades in waves. The waves roll in and then it’s mandatory that they also roll back out. Catching that wave at the right time is what we’re trying to do here Try to find the point where the market is going to turn. This isn’t a case of predicting when a trend might change. We already know that once the wave has come in, it will turn around and go back out. When you realize the value area, or the key market area, that has shown support/resistance in the past, you can keep your entry point risk lower. Watch what’s happening and make your trade from a key chart level or with an underlying trend to get close to the correct point. Don’t mess it up by suddenly deciding that since the market looks weak, you’ll trade at a bottom point of a trend. Wait for the retrace to happen, and then jump in.
Pull Backs Within a Trend
Determine the right point to begin your trade by watching for a trend. Identify the overall direction and momentum of a particular chart. Whichever direction the market is moving is most likely the way it’s going to continue, so that path would provide the least resistance So then, take into account that the market never moves in a straight line. You’ve determined which way the market is headed, so now begin to watch for pull backs or retracements within that trend. Grab those blips in the trend to jump in and make trades. By identifying support and resistance levels and then watching for a price to pull back, you could either choose that time to enter or you could get a price action confirmation signal and then enter the direction of the recent market trend. This type of moving average is easier to visualize in obvious trends.
As a general rule, the market moves in lengthy trends. Many times, we jump the gun because we think the trend must be coming to an end. Instead, set up your pull back trading strategy and follow it for surprising results.