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
- Elliot Wave
- Dow’s Theory
- Bollinger Bands
- Stochastic Indicator
- Trend indicators
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.
How do I identify a pullback on a chart?
A pullback is usually identified by a temporary increase in price that interrupts a downtrend. The price may reach a support level that had previously been broken before resuming its downward movement. Some traders also use other indicators like trading volume for confirmation.
Is a pullback a good time to enter the market?
Many traders see a pullback as an opportunity to enter the market for short-term gains. However, it’s essential to use additional indicators and analysis to confirm that it is indeed a pullback and not a trend reversal to minimise risk.
How do I differentiate a pullback from a trend reversal?
It can be challenging to differentiate between the two. Traders often use additional technical indicators like trading volume, moving averages, or momentum indicators to confirm whether it’s a pullback or a trend reversal.