Price action trading – a pullback

Pullback is a temporary correction that often occurs after a significant movement. Remember that pullbacks do not guarantee the trend continuation and can easily turn into reversal moves. However, a combination of pullback and other technical tools and techniques can provide great trading opportunities.

There are two types of a price action leg of a move: impulse leg and pullback.

Impulse leg is a strong bullish/bearish movement that determines the market sentiment and trend.
While a pullback is the movement WITHIN the impulse.
The impulse leg has the level of its high and the level of its low.
If the impulse leg is bearish, a pullback initiates from its low and should complete strictly BELOW its high.
If the impulse leg is bullish, a pullback movement starts from its high and should end ABOVE its low.

Simply put, a pullback is a correctional movement within the impulse.
It occurs when the market becomes overbought/oversold after a strong movement in a bullish/bearish trend.

Here are 3 main reasons why pullbacks are important:

1. Trend confirmation
   If the price keeps forming pullbacks after bullish impulses, it confirms that the market is in a bullish bearish trend.
   While, a formation of pullbacks after bearish legs confirms that the market is trading in a downtrend.

2. Entry points
   Pullbacks provide safe entry points for perfect trend-following opportunities.
   Traders can look for pullbacks to key support/resistances, trend lines, moving averages or fibonacci levels, etc. for shorting/buying the market.

3. Risk management
   By waiting for a pullback, traders can get better reward to risk ratio for their trades as they can set tighter stop loss and bigger take profit.