What are Pullbacks?
To trade pullbacks in Binary Options like a pro, you must first understand what pullbacks are. And what are they?
Pullbacks, also called retracements, are periods of price correction before the primary trend resumes.
The price temporarily goes against the initial trend for a short while before embarking on the trend that was initially.
Uptrends will have downward pullbacks while downtrends will have upward pullbacks, and then each trend will continue as was initially.
After a downward pullback on an uptrend, the uptrend will resume and the price will rally upwards.
Conversely, after an upward pullback on a downtrend, the downtrend will resume as the price falls again.
Price Action traders know that the markets do not move straight up and down.
Forex markets experience moments of pause and price corrections in the opposite direction before they continue rallying in a given direction.
A pullback is often a perfect opportunity to buy an asset on an uptrend or sell an asset on a downtrend.
This is because buyers or sellers pause for a while for certain conditions before they pump in their resources and the initial trend resumes.
Trading Pullbacks in Olymp Trade like a Pro.
Establish the Initial Trend.
Do you have a problem establishing a market trend?
Then you should never have such a problem after reading this.
You will resort to an uptrend if the price keeps moving up, posting higher highs and lows.
On the other hand, downtrends are shown if the prices keep moving down, posting lower highs and lows progressively.
Identify a Pullback.
After you have established the prevailing trend, what you want to do is to look for pullbacks or retracements in such a trend.
As earlier indicated, you will be looking out for downward pullbacks on an uptrend and upward pullbacks on a downtrend.
But there is a problem.
What I am about to reveal here is what separates the chaff from real wheat, pros, and inexperienced traders.
Traders will always confuse pullbacks with trend reversals.
They all begin the same because a price reversal only needs to begin as a pause in the initial trend and then it rallies in the opposite direction for more than anticipated.
How do you tell a pullback from a trend reversal?
Pullbacks are short and temporary price movements in the opposite direction to the initial trend.
Price reversals, however, are permanent and long price movements in the opposite direction to a given trend.
How will you know that an opposite price movement to the primary trend is bound to be short and temporary or long and permanent?
Look out for the following differences:
- It is a pullback if the primary trend appears to be strong and turbulent. If the price has had periods of sideways movement, it might as well be a reversal.
- A pullback will occur away from possible support or resistance levels. A reversal will mostly be sure if it is occurring in a support or resistance zone.
- It is a pullback if it is not accompanied by RSI, MACD, or any other oscillator evidence for overbought or oversold conditions. A price reversal will usually be accompanied by overbought or oversold conditions as shown by most oscillators and technical analysis tools.
- Pullback candlesticks will often be rejected in the direction of the initial trend. Trend reversal candlesticks will, however, be rejected in the direction opposite to that of the primary trend.
Confirm the pullback.
Have you established that it is actually a pullback and not a price reversal?
If so, then you only need a confirmation signal, just to be sure before you enter a position.
Confirmation signals may be in form of technical analysis tools, candlestick patterns, or any other as you please.
If at the time the downward pullback has happened on an uptrend, your chart analysis tools or candlestick patterns show a bullish signal, then you have confirmed such a bullish pullback.
Bearish pullbacks occurring upwards on downtrends will be confirmed by bearish signals of your chart analysis tools as well as bearish candlestick patterns.
Bullish confirmation signals include increased momentum and the hammer, morning star, and upward rejection candlesticks.
Bearish confirmation signals include decreased momentum and the shooting star, evening star, and downward rejection candlesticks.
Enter a buy or sell position.
Conditions to enter a buy position are:
- A bullish pullback occurring downward on an uptrend.
- A bullish confirmation signal for the pullback.
Conditions for a sell position are:
- A bearish pullback occurring upward on a downtrend.
- A bearish confirmation signal for the pullback.
Adjust your Stop Loss and Take Profit.
If trading Forex, you must always adjust your Stop Loss and Take Profit levels reasonably.
The most preferred manner of adjusting such levels is the use of proper risk to reward ratios.
You want to risk a small portion of your trading account and at the same time earn reasonable profits from your stake.
In that case, you must always ensure that you risk not more than 5% of your trading account in one trade.
After that, the amount you risk with your Stop Loss must be at most half of what you target with your Take Profit.
That is to mean that your risk to reward ratio must always be at least 1:2.
You can target more as you wish, but not less than twice what you risk, for it is the only other reasonable way you can emerge profitable.
Wrapping up on how to Trade Pullbacks in Olymp Trade like a Pro.
Now you know what pullbacks are and when they occur on Olymp Trade.
You are now a pro because you can tell the difference between a pullback from a trend reversal.
What else are you waiting for?
Go ahead and start practicing pullback trading with your demo account.