Pullbacks are common occurrences in the forex market and they present profit-making opportunities for traders who know how to successfully trade them. A pullback occurs whenever a breakout occurs at a strong resistance or support level (trendline or any chart formation) and then the market moves in a direction that goes against the general trend (and the original breakout) to retest the level of the support or resistance level or chart formation once again.
A pullback usually represents a significant move in the opposite direction to the general trend (and the previous breakout) which presents a profit-making opportunity.
The likelihood of entering the trade at a good time is more likely to occur when the trade is entered at a possible pullback point (after the price retests the broken S/R zone and confirms the breakout). Since the pullback confirms the breakout, the potential to profit is great – like you can see below.
Once a strong trend is identified, the forex trader should then identify key levels of support and resistance and then look for any breakout points. Once a breakout occurs, a pullback is very likely to occur.
However, vertical price action is necessary if a pullback is to occur which means that the price must clearly move consistently upward or downward rather than sideways. This means that consolidation should not occur or that it should be short-lived.
Below is an example where GBPUSD slowed down after the breakout and moved sideways little bit. But still it is just unbelievable how the broken resistance zone reversed to a strong support zone. This is a nice example of the breakout followed by the pullbacks (retests of the S/R zone). Bullish pullbacks are also often referred to as throwbacks.
Based on our experience, candlestick patterns usually work the best when it comes to confirming the pullbacks. A great example can be seen below. Note how EURUSD broke the support zone with the runaway gap – confirming that there is a strong bearish sentiment. Then absolutely accurate pullback together with the Outside Bar pattern followed. This was a great pullback opportunity.
Pullbacks present great profit-making opportunities for forex traders. The key is to identify when a pullback is underway and to enter and exit the trade at strategic points.