Pullback Definition and Example

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Updated Jun 30, What is a Pullback? A pullback is a pause or moderate drop in a stock or commodities pricing chart from recent peaks that occur within a continuing uptrend.

The term pullback is usually applied to pricing drops that are relatively short in duration - for example, a few consecutive sessions - before the uptrend resumes. Key Takeaways A pullback is a temporary reversal in the price action of an asset or security. The duration of a pullback is usually only a few consecutive sessions.

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A longer pause before the uptrend resumes is generally referred to as consolidation. Pullbacks can provide an entry point for traders looking to enter a position when other technical indicators remain bullish.

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What Does a Pullback Tell You? Pullbacks are widely seen as buying opportunities after a security has experienced a large upward price movement.

The positive earnings, however, are a fundamental signal that suggests that the stock will resume its uptrend.

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However, the strong earnings report suggests that the business underlying the stock is doing something right. Buy and hold traders and investors will likely be attracted to the stock by the strong earnings reports, supporting a sustained uptrend in the near-term.

This simply means jumping into a market that has established a trend, and then has gone against that trend as markets typically do, forming an ebb and flow over time. Quite often, traders will look for value in a situation like that, and by when the market falls slightly after an impulsive move higher. This gives traders who may have missed out on the initial surge higher an opportunity to get involved, which they almost always will try. Obviously, it works in both directions. So if the market is falling over the longer-term, it will occasionally have a bit of a bounce, and sellers will jump in at that point.

Every stock chart has examples of pullbacks within the context of a prolonged uptrend. So how can traders distinguish between the two?

Our team at Trading Strategy Guides puts a lot of focus on trend direction.

Similarly, it could be a negative settlement, a new competitor releasing a product or some trading on a trend pullback event that will have a long-term impact on the company underlying the stock. These events, while happening outside of the chart, so to speak, will appear over several sessions and initially will seem much like a pullback. For this reason, traders use moving averages, trendlines and trading bands to flag when a pullback keeps going and is at risk of entering reversal territory.

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Limitations in Trading Pullbacks The biggest limitation of trading pullbacks is that a pullback could be the start of a true reversal. Being that both pullbacks and reversals happen on a range of timeframes, including intraday if you want to go granular, one trader's multi-session pullback is actually a reversal for a day trader looking at the same chart.

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If the price action breaks the trendline for your timeframe, then you may be looking at a reversal rather than a pullback. In this case, it is not the time to enter a bullish position.

Pullbacks happen all the time and if you learn how to trade pullbacks, you can enhance your repertoire and find many more high probability trading scenarios.

Of course, adding other technical indicators and fundamental data scans to the mix will increase a trader's confidence in identifying pullbacks from true reversals. Compare Accounts.

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