For starters, the security you just bought on the dips or sold short into resistance can keep on going, forcing your position into a sizable loss, or it can just sit there gathering dust while you miss out on a dozen other trades.
So what skills are needed to book reliable profits with pullback strategies, how aggressively should those profits be taken and how do you admit you are wrong without breaking the bank?
First, you need a strong trend so that other pullback players will be lined up right behind you, ready to jump in and turn your idea into a reliable profit. Vertical action into a peak or trough is also needed for consistent profits, especially on higher-than-normal volume, because it encourages rapid price movement after you get positioned.
It is also best when the trending security turns quickly after topping or bottoming out, without building a sizable consolidation or trading range. Microsoft MSFT builds a three-month trading range below 42 and breaks out on above average volume in July, rising vertically to A midday turnaround prints a small doji candlestick red circle , signaling a reversal , which gathers momentum a few days later, lifting more than 2 points into a test of the prior high.
The stock then resumes its strong uptrend, printing a series of multi-year highs. Look for cross-verification once the pullback is in motion. This term denotes narrow price zones where several types of support or resistance line up, favoring a rapid reversal and a strong thrust in the direction of the primary trend.
The odds for a bounce or rollover increase when this zone is tightly compressed and diverse kinds of support or resistance line up perfectly. Even so, you can enter pullbacks in less advantageous circumstances by scaling into conflicting price levels , treating support and resistance as bands of price activity rather than thin lines.
Janus Capital Group JNS carves out a 9-month trading range with resistance at 13 and goes vertical in a heavy volume breakout after a well-known hedge fund manager joins the company. The stock turns on a dime, jumping back above 15 and resuming the uptrend at a slower pace. It prints a six-year high two months later. Take profits aggressively after trade entry or scale out , pocketing cash as the security recovers lost ground.
Customize risk management to the specifics of that retracement pattern by placing Fibonacci grids over a the last wave of the primary trend and b the entire pullback wave. This combination can reveal harmonic price levels where the two grids line up, pointing to hidden barriers. Gaps and small trading ranges also need to be watched for counterswings because pullback plays always carry the risk of printing lower highs in uptrends and higher lows in downtrend. In most cases, the best exits will occur when price moves rapidly in your direction into an obvious barrier, including the last major swing high in an uptrend or swing low in a downtrend for related reading, refer to Introduction To Swing Charting.
Marathon Oil MRO breaks month support at 31 in November, in sympathy with declining crude oil prices. The high volume decline bottoms at A second retracement grid placed over the pullback wave assists trade management, picking out natural zones where the downtrend might stall or reverse. The bull hammer reversal at the Losing trades with pullback plays tend to occur for one of three reasons.
First, you miscalculate the extent of the countertrend wave and enter too early. Second, you enter at the perfect price but the countertrend keeps on going, breaking the logical mathematics that set off your entry signals.
Third, the bounce or rollover gets underway but then aborts, crossing through the entry price because your risk management strategy failed. The final case is the easiest to manage. Place a trailing stop behind your position as soon as it moves in your favor and adjust it as the profit increases.
The stop needed when you first enter the position is directly related to the price chosen for entry. As you gain experience, you will notice that many pullbacks show logical entries at several levels.
The longer you wait and the deeper it goes without breaking the technicals, the easier it is to place a stop just a few ticks or cents behind a significant cross-verification level. You will miss perfect reversals at intermediate levels with a deep entry strategy but it will also produce the largest profits and smallest losses.
If you choose to take many shots at intermediate levels, the position size needs to be reduced and stops placed at arbitrary loss levels such as to cent exposure on a blue chip and one- to two-dollar exposure on a high beta stock such as a junior biotech or China play. The stock bounces just under support, drawing in dip buyers but the recovery wave stalls, triggering a failed breakout. Breakouts and breakdowns often return to contested levels, testing new support or resistance after the initial trend wave runs out of steam.
Pullback positions taken close to these price levels show excellent reward to risk profiles that support a wide variety of swing trading strategies for additional reading, refer to Introduction To Swing Trading. Dictionary Term Of The Day. A conflict of interest inherent in any relationship where one party is expected to Broker Reviews Find the best broker for your trading or investing needs See Reviews.
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Become a day trader. Taking Opportunistic Profits Take profits aggressively after trade entry or scale out , pocketing cash as the security recovers lost ground.
Effective Stop Loss Strategies Losing trades with pullback plays tend to occur for one of three reasons. No thanks, I prefer not making money. Get Free Newsletters Newsletters.More...