Pullback trading is a strategy that enters trades during temporary price retracements within an established trend. Instead of chasing prices higher, pullback traders wait for the market to come to them, offering better entry prices and improved risk-reward ratios.
What is a Pullback?
A pullback is a temporary price decline within an overall uptrend, or a temporary rally within a downtrend. Key characteristics include:
- Price moves against the primary trend direction
- Volume typically decreases during the pullback
- The overall trend structure remains intact
- Price finds support at a logical level before resuming the trend
Key concept: Pullbacks are normal, healthy parts of any trend. They allow overbought or oversold conditions to reset, building the energy for the next trend move.
Why Pullback Trading Works
Pullback trading has several advantages:
- Better entries: You buy at lower prices than trend chasers
- Tighter stops: Clear invalidation points allow smaller stop losses
- Higher win rates: Trading with the trend increases probability
- Improved psychology: Waiting for pullbacks reduces FOMO trading
Types of Pullbacks
1. Moving Average Pullbacks
Price retraces to a key moving average before bouncing:
- 20 EMA for aggressive trends
- 50 EMA for moderate trends
- 200 SMA for major support in long-term trends
2. Fibonacci Retracement Pullbacks
Price retraces to Fibonacci levels:
- 38.2% for shallow pullbacks in strong trends
- 50% for normal pullbacks
- 61.8% for deep pullbacks (last chance before trend failure)
3. Support/Resistance Pullbacks
Price pulls back to previous resistance (now support) or previous support (now resistance).
4. Trendline Pullbacks
Price retraces to touch an uptrend line before bouncing higher.
Entry Rules for Pullback Trading
Step 1: Confirm the Trend
Before looking for pullbacks, verify a clear trend exists:
- Higher highs and higher lows for uptrends
- Lower highs and lower lows for downtrends
- Price above the 50 or 200 EMA for uptrends
- ADX above 25 indicates a trending market
Step 2: Wait for the Pullback
- Let price retrace to your target level
- Do not anticipate - wait for price to actually reach the level
- Monitor for decreasing volume during the pullback
Step 3: Wait for Reversal Confirmation
Do not buy just because price touched support. Wait for signs the pullback is ending:
- Bullish candlestick patterns (hammer, engulfing, morning star)
- Momentum indicator turning up (RSI, Stochastics)
- Price closing back above a short-term moving average
- Volume increasing on the bounce
Pullback Entry Example
Stock ABC is in an uptrend, making higher highs above the 20 EMA.
Price pulls back from $55 to touch the 20 EMA at $52.
A bullish hammer candle forms at $52 with RSI at 40.
Entry: Buy at $52.50 when price breaks above the hammer high.
Stop: $51.00 (below the hammer low).
Target: $57.00 (new high target, 3:1 reward-to-risk).
Exit Rules for Pullback Trading
Stop Loss Placement
- Below the pullback low: The most common stop placement
- Below the support level: Give some buffer below the bounce point
- ATR-based: 1.5-2x ATR below the entry
Profit Targets
- Previous high: Target the most recent swing high
- Measured move: Project the prior leg distance from the pullback low
- Risk multiple: Target 2:1 or 3:1 reward-to-risk
Trailing Stop Methods
After price moves in your favor, protect profits:
- Move stop to breakeven after 1R profit
- Trail below each new higher low
- Use the 10 or 20 EMA as a trailing stop
The 20 EMA Pullback Strategy
A popular and effective pullback method:
Rules for Long Trades
- Stock must be above the 20 EMA and 50 EMA
- Wait for price to pull back and touch the 20 EMA
- Look for a bullish candlestick at the 20 EMA
- Enter when price breaks above that candle's high
- Stop below the pullback low
- Target the previous high or 2:1 reward-to-risk
20 EMA Strategy Example
Stock is trending with 20 EMA at $48 and 50 EMA at $45.
Price rallied to $52 then pulled back to $48.20 (near 20 EMA).
Bullish engulfing candle forms, closing at $49.
Entry: $49.25 (break of engulfing high).
Stop: $47.75 (below pullback low).
Target: $52.75 (2:1 risk-reward).
Fibonacci Pullback Strategy
- Identify a clear impulse move (swing low to swing high)
- Draw Fibonacci retracement levels
- Wait for price to retrace to 38.2%, 50%, or 61.8% level
- Look for bullish reversal candles at these levels
- Enter with stop below the 78.6% level
When to Avoid Pullback Trades
- Choppy, sideways markets with no clear trend
- When pullbacks are deeper than 61.8% (trend may be reversing)
- During high-impact news events
- When volume increases during the pullback (distribution)
- When the overall market is moving against your trade direction
Pullback Trading Checklist
- Is there a clear, established trend?
- Has price pulled back to a logical support level?
- Is volume decreasing during the pullback?
- Is there a bullish reversal signal?
- Is my stop loss at a logical level?
- Is the reward-to-risk ratio at least 2:1?
Common Pullback Trading Mistakes
- Buying before the pullback is complete (catching a falling knife)
- Ignoring reversal confirmation signals
- Trading pullbacks in sideways or weak markets
- Setting stops too tight and getting stopped out
- Buying every small dip instead of waiting for quality setups
- Fighting the trend by buying pullbacks in downtrends
Track Your Pullback Trades
Pro Trader Dashboard helps you analyze which pullback levels and setups work best for you.
Summary
Pullback trading offers better entries than chasing trends by waiting for temporary retracements. The key is confirming the trend first, then waiting for price to pull back to a logical support level like a moving average or Fibonacci level. Always wait for reversal confirmation before entering, and use tight stops below the pullback low. With patience and discipline, pullback trading can consistently capture trend continuation moves with favorable risk-reward ratios.
Learn more: moving averages and trend following.