Pullback: what is it and how do traders use it?

Pullback is a term often used in trading. It refers to a temporary decrease in an asset’s price that interrupts its current trend. Despite sounding complex, the concept is more straightforward than it appears. In technical analysis, which relies heavily on charts, the term “pullback” is frequently encountered. Many traders use this feature to inform their investment choices.

Some people use the term ‘pullback’ loosely to describe any temporary price reversal that tests a support or resistance level. However, strictly speaking, the term applies only to price declines in a bearish trend. When a price decline happens in an upward or bullish trend, the correct term to use is “throwback.”

Graphically, a pullback happens when the stock’s price is dropping and then briefly reverses to test a level that it had previously crossed. This level, once a support, becomes a temporary resistance. After reaching this point, the price typically resumes its downward course.

Traders often view a pullback as a brief “pause” in the bearish trend, presenting a possible opportunity to enter the market. The idea is to adopt a short-term strategy that capitalises on this temporary price movement before the downward trend continues.

In summary, a pullback is a trading indicator signalling future price movements. Specifically, it is a brief reversal in a stock’s falling price that tests a previously crossed support level before resuming its downward trajectory.

Difference between pullback and throwback

Technical analysts often use the term “pullback” to describe a temporary price reversal, regardless of whether the asset is in an uptrend or a downtrend. However, it’s important to note that the term “pullback” technically applies to a temporary reversal during a downtrend. When a similar event happens during an uptrend, it’s more accurately called a “throwback.”

In a chart, a throwback is seen when the asset’s price is rising, temporarily stops, and then falls back to a previously surpassed resistance level before resuming its upward movement. Some people don’t differentiate between a pullback and a throwback, but technically, they are different. In short, a pullback is observed during a downtrend, while a throwback occurs during an uptrend.

What does pullback mean?

Understanding a pullback is crucial for traders practising technical analysis. When traders spot a pullback, they usually see it as an opportunity to enter the market and take short positions, anticipating that the downward trend will continue.

However, it’s challenging to know for sure whether it’s a genuine pullback or a reversal in the trend. If traders act too quickly and it turns out the trend is reversing, they could incur significant losses. To improve their analysis, traders often also look at trading volume and other technical indicators for additional information.

Example of pullback

In practical examples like the EUR/USD chart below, you can identify pullbacks at various points where the price touches levels that had previously been broken. These instances are marked by dates on the chart, showing several examples of what pullbacks look like in real trading scenarios.

Other recommended articles

• Beginner’s guide to technical analysis
• Fibonacci
• Elliot Wave
• Dow’s Theory
• RSI
• MACD
• Bollinger Bands
• Stochastic Indicator
• Trend indicators

Pullback: summary

In conclusion, a pullback is a temporary reversal in the price of an asset during a downtrend, allowing traders an opportunity to enter the market for short-term gains.

FAQs