All About Single Leg Pullbacks
Enter on weak pullbacks in the strong trend and fade the weakness at the structural boundaries. This one sentence defines my whole strategy. But it’s not as simple as it appears. In hindsight, everything looks simple and anyone with a minimal trading knowledge can point out where the high probability trading opportunities were when he was given a chart. In reality, trading is uncertain and we are trading at the hard right edge of the chart where there are no candles to the right and then trading becomes one of the toughest businesses in the world. There is no doubt in raking it at 5th position in toughness considering all the businesses on this earth.
Look at the above image and how easy it is to say to take a trade at the arrow pointed in the chart as the trend is up and the pullback is weak in hindsight.
The above image is the lower timeframe chart for the previous image and sees how messy the price action is. The arrows pointed in the chart are the possible entry triggers to place us in the trade but only the third one worked in the end.
Now you can ask me why I was looking into two timeframes. The entry would have been perfect if I use only one timeframe. But trust me, I tried that too and most of the times, using a single timeframe gave late entries and those late entries decreased my profit potential and also caused significant damage to my account when they failed. Timing an entry in a pullback with minimal risk is truly difficult in realtime. But pullbacks are one of the high probability trade setups if timed perfectly.
We cannot say which pullback is going to work and which will not except in hindsight. But if you time the market perfectly with minimal risk in the PB setup, your profits will be beautiful when the pullback works and your losses can be limited when it fails as you are decreasing the initial risk. What else do we need?? 😀
So, our biggest question now is , “How to time the entry in the damn PB setup?”
Again, I am giving my checklist while hunting for a PB setup in realtime. Modify them if you find any with your experience and make them your own. But practice them as rigorous as possible.
My checklist while searching for a PB setup:
Identify the location where the market has paused in trend direction and started the pullback.
A pullback started at the structural boundary is better to avoid as that might be a TST counter-trend setup of the structural boundary unless the pullback is ultra-weak or it traps a lot of counter-trend traders. Also, keep an eye on important price levels like High of the day, Low of the day, High of the previous session, Low of the previous session etc. while looking for a pullback setup.
Identify how the pullback started.
If the pullback starts with a strong counter-trend signal like a tweezer top, engulfing pattern with big candle ranges etc. avoid the pullback on the first sign of strength against the trend direction. And sometimes, pullbacks started with the same patterns shows obvious weakness against the trend and in those cases, it is a must take the trade as a lot of people might get trapped in counter-trend positions on seeing those strong counter-trend patterns and when it shows weakness against the trend, they are trapped and we can profit from their emotional decisions.
Is the pullback swing showing weakness with respect to the previous pullback?
Never ever take a PB trade if it shows clear strength against the trend. I am telling with my personal experience, I have paid a lot to the market trading against the strength. The main trap here is, the risk to reward ratio will be outstanding and you can get an easy fill while trading against the strength and that pushes us to place the orders and donate our money to the professional traders. Weakness must be clearly evident in the pullback.
Decreasing candle ranges while the pullback progresses, deceleration in the pullback swing, formation of trapped patterns and candlestick reversal patterns which triggers a trade in the direction of the trend are possible indications of weakness.
Is the pullback swing showing weakness with respect to the previous swing in the trend direction? (Impulse swing)
Now, you must compare the weakness of the pullback with respect to the recent impulse move. Pullback must be weak when compared with the swing in the direction of the trend.
What are the possible locations that will offer order flow against the pullback direction?
This is the final and important step of all the above. 90% of the traders who wait for the pullback entry don’t consider this step in their analysis. We must identify those recent locations between the trend violation point and the recent swing high (in uptrend)/swing low (in a downtrend) where price faced some rejection while trying to move against the trend. These locations are the possible places where the pullback might end. Identifying these locations before the market reaches those areas makes our life very easy and keeps us in a greater advantage than those traders who are also waiting for the same setup. In fact, we can play with limit orders around those areas when there is a clear weakness against the trend which limits our risk substantially. You can use your lower timeframe for this purpose for a zoom-in view into the recent market price action.
Look at the above image. That red zone market is the area where price tried to move up and got rejected. This area might act as opposing order flow in the direction of the trend in the future.
Now look how pullback has ended at that zone in the following figure.
dI intentionally added this image where pullback hasn’t moved to the new lows. Entering with limit order closer to this location will protect us from a lot of surprising scenarios. Here, even if you exit at that stall formed on the right-hand edge, you will be in a small profit. True that it’s hard to catch tops and bottoms in real-time, but those are the locations where professionals enter and there is nothing wrong in hunting those areas. After all, it is our money we are risking.
What if you cannot find those areas beforehand?? This will not close gates to PB setup hunting. Wait and the market will give clues where it is likely to end its pullback.
P.S:- You must perfectly identify the setup areas before trying this in realtime. It needs practice and experience.