How to Trade Pullbacks and Rallies

How to Trade Pullbacks and Rallies

Submitted by adil on Wed, 01/22/2014 - 11:18

Pullbacks and rallies are two important components of Forex trading that should be taken as opportunities rather than threats. Pullbacks and rallies occur in uptrend and down trend markets respectively and there are certain methods to take maximum advantage out of them in either case.

Rallies and pullbacks are the features of swing trading. Therefore, if you have a swing trading system in place or know how to tackle these rallies and pullbacks and enter the trade when they end, there is every possibility that you can take a lot of profit with your trades.

However, most of the swing traders fail to recognize the accurate entry points and enter at the wrong time. As a result, they surprisingly get caught in the trades at the start of rallies and pullbacks instead of their end.

Now a big question is why this happens in the first place and the answer is very simple. One explanation is that market was already due to reverse at the price level and time when you placed a trade. Resultantly, you entered in the market exactly at the time when the price just started moving upward in a downtrend market (Rally). The price will start to decline again as the rally will eventually end because overall market is still in downtrend.

How to Trade Pullbacks and Rallies Effectively:

There are many points you need to consider while you are trading pullbacks and rallies. For instance, the basic principle of swing trading is to enter short trade or initiate sell order when the rally has just ended or about to end. This will help you to keep with the “market flow” as you will be trading in overall downtrend.

The same is true for trading pullbacks in your favor. You need to learn to recognize when a pullback has ended or is about to end so that you can trade successfully. In this case, you will initiate a buy order as you know that overall market is in uptrend.

However, some traders encounter three very important problems at this stage.

Firstly, there is never as certain time or price level for rallies and pullbacks to end and it becomes difficult for traders to place enter at accurate point. There seems to be only one solution to this problem. Traders usually have to suffer from couple of losses before they can place a perfect trade at the time when pullbacks or rallies actually end.

Secondly, it is really a cumbersome task to sell when rallies are happening or to buy when pullbacks are happening. Most of the traders refuse to sell or buy when price is rising or falling respectively. However, you need to trust your Forex trading chart that might be indicating that a pullback or rally is about to end and it the best time to buy or sell and take profits.

All Pullbacks and Rallies are not profitable:

Last but not the least, all rallies and pullbacks are not beneficial and therefore, you only need to pick those that you will actually trade. In upward rally, the best time to place short trade is when the price hits downward trend lines or horizontal resistance levels. Similarly, it is also good to place short trades at resistance levels provided by Fibonacci levels, pivots or moving averages. Similarly, you need to use these levels while trading pullbacks in downtrend.

Finally, it is always advisable to use candlesticks present around above mentioned areas of importance to boost your entries.