Lesson 4 of 20 · 10 min
Pullback
Step 1
What it is
Markets rarely move in a straight line. After a strong move, price often pauses and comes back part of the way. A pullback trade waits for that pause instead of buying at the furthest point.
The hard part is telling a pullback from the start of a reversal. You cannot know in advance, which is why the stop matters.
Traders use it because entering after a pause allows a much closer stop than chasing the move.
Step 2
See it on a chart
A strong move, followed by a quieter pullback.
Illustrative chart with made-up prices and tick volume, built for teaching. It is not real market data and not a trade idea.
Step 3
The exact rules
What must be true before entry
- A strong move with real force behind it.
- Price coming back on lighter volume.
- A sign the pullback has stopped, such as a close back in the direction of the move.
What volume should show
Where to enter
Where the hard stop goes
Where the target goes
What invalidates the idea
- The pullback gives back the whole move.
- Volume grows as price comes back.
When not to take it
- The move before it was weak.
- You are entering before there is any sign the pullback has stopped.
- Major news is due soon, or you would be trading outside your planned hours.
- You have just taken a loss and feel the need to win it back.
Step 4
Your turn: plan the trade
After a strong move down, price has pulled back up on lighter volume. Mark your plan.
This setup is a short. Look at the candles and the volume. Choose a line below, then tap the chart to place it. You can also drag its label or type a price.
Illustrative chart with made-up prices and tick volume, built for teaching. It is not real market data and not a trade idea.
Step 5
The trap: averaging down
A pullback that keeps going can feel like a better and better price. It is also what a losing trade feels like. Plan one entry and one stop, and do not add to it.
Take the Personal Litmus TestStep 6