3 Pullback Trading Strategies You Must Know

 

3 Pullback Trading Strategies You Must Know

Pullback trading is a perennial favourite among both new and seasoned traders. And it’s not surprising as looking for pullbacks ensures that you align yourself with the market. On top of that, it also allows for a superior reward-to-risk ratio.

In this article, you’ll find ten handpicked pullback trading strategies.

 

3 Pullback Trading Strategies

Strategy #1: The Holy Grail Setup (ADX)

Linda Raschke’s Holy Grail setup uses the ADX indicator to locate a robust trend.

Then, it uses a moving average to time the entry.

1. ADX rising above 30 indicates a powerful trend in either direction. In this example, the bull trend is apparent.
2. These instances of pullbacks to the 20 SMA were potential long pullback entries.

Strategy #2: RSI Hidden Divergence

The typical RSI divergence seeks reversal setups

But the hidden divergence offers continuation trades.

This chart below shows a bearish retracement trade.

1. The momentum pushed higher, according to the RSI plot.
2. However, the price action did not create a new swing high. This formation is a bearish hidden divergence. You can use it to time a pullback entry into the bear trend.

Strategy #3: Pullback Trading Zones with Heiken-Ashi

The indicator here is the Heiken-Ashi plot which is smoother than the standard candlestick chart.

If you are encountering Heiken-Ashi bars for the first time, they might seem radical. But they do offer a helpful perspective to price action.

Learn more about Heiken-Ashi bars here.

The idea behind this strategy is to use Heiken-Ashi bars to spot a zone where the pullback might end.

The chart below points out the Zone Bars.

1. A shaved top Heiken-Ashi candlestick represents bearish momentum. Here, it confirms a significant bearish pullback.
2. Once we see top shadows appearing, we define a Zone Bar.
3. We can then focus on these Zones Bars to project support levels. Then, with the actual candlestick chart, we can look for pullback entries within this zone.

For more examples, refer to this guide:

• How To Find Pullback Trade Zones With Heiken-Ashi

Conclusion – Pullback Trading Strategies

All pullback strategies share the same goal. They focus on a single balancing act.

They need to find the optimal trade-off between:

• The certainty that the trend is still in place; and
• A better reward-to-risk ratio

The deeper the pullback, the better the reward-to-risk ratio for a pullback trader. However, a deep retracement can also be a sign of a weakening trend. Hence, the trick is to find a balance that offers you positive expectancy over time.

Once you get this trade-off, you can design a pullback trading strategy with any trading tool you prefer.

Among these ten trading strategies, a couple of them might make the most sense to you. Or you might have found one that fits nicely into your current trading approach. In any case, exploring them yourself is the best way to evaluate them.