Forex strategies

Pullback trading strategy's explanation

Another profitable swing trading strategy, pullback trading refers to trading the pullbacks to previously-broken support and resistance zones. Pullback trading is one of the most popular trading strategies among swing traders.
We’ve already mentioned that support and resistance levels work because of memories of market participants. When one of those levels break, they become the opposite of what they’ve been – a broken support level becomes a resistance level, and a broken resistance level becomes a support level. Pullback traders try to take advantage of this interesting phenomenon of financial markets.
Market participants tend to place pending orders around broken support and resistance level. Sellers place sell orders at a previously-broken support level, and buyers place buy orders at a previously-broken resistance level.
When profit-taking activities of market participants who’ve already been in the market send the price back to the broken support or resistance level, those pending orders get triggered and push the price in the direction of the initial breakout. In general, this is how a pullback forms.
The following chart makes this crystal clear.

When trading pullbacks, a stop-loss should be placed just above the broken support level for short positions, or just below a broken resistance level for long positions. Traders can take profits at the recent swing high or swing low.

Tips for Success with Swing Trading

Limit your losses

– Always use a stop-loss order in all of your trades. Try to risk no more than a small percentage of your trading account, and aim for a profit that is at least twice as high as your risk (i.e. a reward-to-risk ratio of at least 2:1)

Fake breakouts and divergences increase your success rate

– Fake breakouts are great swing trading signals, especially if they form with a bullish or bearish divergence between an oscillator and the price. Try to implement fake breakouts and divergences in your regular trading strategy.

Trade on longer-term timeframes

– Since swing traders hold their trades for a few days, longer-term timeframes should be used to analyse the market and open trades. As a rule of thumb, anything shorter than the 4-hour timeframe is too short for swing trading. Occasionally, you could use the 1-hour timeframe to fine-tune your entry and exit points, but base your trading decisions on the 4-hour or daily chart.

Don’t be afraid of market news

– Unlike day trading, swing trades involve placing wider stop-losses that accommodate for market noise and price-movements that don’t go in your favour. Important market reports often act as crucial catalysts that create volatility in the market, form pullbacks, or resume the underlying trend.