A trader is encouraged to understand market structures properly to interpret the movements in a market. In acquiring such skills and techniques the act of trading will be extremely rewarding and at most profitable. A strong outlook is to have a mindset that is open to learning and the discipline to manage finances properly.
A pullback strategy is a short-term move in the opposite direction of a trend that can be used as a strategy to join an uptrend or downtrend at a relatively advantageous price. This strategy makes use of support, resistance, and Stochastic indicators which is a momentum indicator comparing a particular closing price relative to its previous highs and lows. Traders tend to have their own strategy preferences, so it is mostly advised to use forex strategies that generate more profitable trades.
Definition of indicators used in Pullback Strategy
Stochastics are commonly used to identify the market condition as being overbought or oversold by comparing the closing price with the previous trading ranges over a specific period of time. Data interpretation consists of two lines %K and %D. The mainline is %K which is usually a solid line while %D is a moving average of %K and is represented by a dotted line. The two lines oscillate and cross each other between levels of 0-100 and this determines the market status. When %K crosses the %D line downwards from level 80 it is identified as overbought and traders seek opportunities to sell. On the other end, if the line crosses upwards from level 20 it is considered as oversold and traders seek buying opportunities instead.
Forex traders use support and resistance to identify whether a market indicates a strong demand or supply condition. Support is a price level where a downtrend can be expected to pause because of high interest in buying opportunities. Resistance happens when there is a price increase and there is a concentration of interest in selling. Support indicates that the demand is stronger while resistance indicates supply strength. Another indicator is the Fibonacci Ratio which is a sequence of numbers used to identify possible support and resistance levels to determine an ideal target profit.
How to Use Indicators in Pullback Strategy
- Identify overbought or oversold markets after a pullback on either an uptrend or downtrend movement using Stochastic indicators.
- Determine previous support and resistance levels that have not been tested.
- Confirmation of support or resistance level and identify which are not yet tested by drawing a horizontal line to connect the same swing points.
- Identifying a signal which is aligned with the main trend to avoid making trades in the opposite direction of a trend.
- To engage and trigger the order through utilizing candle formation patterns such as Doji, hammers, engulfing, and others more.
- The overall concept will be:
- For Long: Candle close above the previous day’s low and stochastic crosses over from oversold level with strong support or Fibonacci retracement level.
- For Short: Candle close below the previous day’s high and stochastic crosses over from overbought level with strong resistance or Fibonacci retracement level.
Chart Sample Analysis of Pullback Strategy
Trend: This is a GBPJPY chart with an H4 timeframe with a plotted trendline that determines the major trend direction of this currency pair. The trendline below shows that it is an uptrend market direction.
Pullback: Once the trend is identified, a pullback will be expected with a bounce from the trendline to continue an upside direction. As per the sample chart, this is expected to be around 136.200 level and it is marked with a horizontal line.
The image below shows that the price respected the trendline with the support level at 136.200 and was previously the resistance level. Stochastic indicators confirmed an oversold level and as the findings imply, this would have warranted a buy order at the reversal candle which is a bullish engulfing.
Initially, the forex strategy requires patience and understanding to merit rewards accordingly. The pullback strategy is great for both market directions and it may also be used on lower timeframes with a slight parameter adjustment. Higher timeframes have lower market noise and trades may be done calmly and unrushed. Having a good risk to reward ratio is a continuously developed skill that enables traders to project better investment returns.
Forex strategy is defined as a combination of a mathematical and practical method to trade in the forex market. Basically, forex trading is the art of eliminating the losing trades and gaining profit. therefore it is important to manage your investment by participating in the market with the proper trading strategy. The pullback strategy is one of the effective strategies for traders and has been successful. Be open to learning, be patient and trust the process. Happy trading!
How to Learn Forex Strategies and Start Trading
Choosing a successful trading strategy is considered the right path to access the forex market. Initially, there are numerous trading strategies that have been designed and developed over decades by traders and intuitions. However, in the financial market, there is always a wide range of factors including uncertainty, liquidity, risk tolerance, and investment capital which an individual trader needs to study before choosing the best suitable trading strategy. In order to increase their chance of gaining profit, forex traders should learn forex with a focus on mastering different types of strategies.
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