Part 14 Technical Analysis – Pullback or throwback

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Part 14: Technical Analysis – Pullback or throwback

Today’s part of technical analysis series will be dedicated to pullbacks (throwbacks). We will talk about the definition of pullbacks, their differences, how to spot them and what are some practical information for a binary options trade, so let’s begin.

What is pullback / throwback

It is the return of the price to the predefined line of support or resistance, which was already broken. After the return follows the classic example of support and resistance role switch. There is a slight difference between pullback and throwback, but I use them interchangeably and prefer term pullback. As you will see, the difference really is minor.

  • Pullback – Price breaks line of support from the top, for a short moment, returns back and transforms support into resistance from which it reverses.
  • Throwback – Price breaks line of resistance from the bottom, return and creates support from resistance.

How to use pullback?

Pullback can be used, for example, in trading with the use of Fibonacci lines, or with various lines of support and resistance, which can be drawn either by us or by an indicator.

If the price has changed to downtrend after uptrend and is heading down now and we have Fibonacci lines drawn, we wait until price crosses one of them and performs a pullback, using which we can make a trade. On picture no. 2 you will find a great example of pullback usage and PUT option trade.

Picture no. 2: Here you can see pullback followed by a reverse from Fibonacci line. This trade went smooth. Binary options trade can be fun! ��

As you can see on picture no. 2, the price was rising. Afterwards, it progressed into a downtrend, so we could draw Fibonacci lines. Price reversed from the first line, therefore, there was no pullback, but after another reverse, a perfect opportunity for trade arose. As a homework, check picture no. 3 and try to find a pullback. Write me into comments section where it is located and why you would or would not trade it. I will check and evaluate all comments! ��

Homework: find call and put trades (picture)

Author

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I’ve wanted to build a business of some kind and earn money since I was in middle school. I wasn’t very successful though until my senior year in highschool, when I finally started to think about doing online business. Nowadays I profitably trade binary options full-time and thus gladly share my experiences with you. More posts by this author

Throwback

What is a Throwback

A throwback can occur after a price breaks through its resistance line on a technical chart. A throwback is the opposite of a retraction after a price breaks through its support line on a technical chart. A throwback pattern will show a price moving higher through its resistance but then retracting towards the resistance line.

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BREAKING DOWN Throwback

Throwbacks can be important technical patterns for technical traders. Generally, traders will typically use an envelope channel chart in their technical analysis of security prices. Envelope channels create fluid resistance and support trendlines around the price of a security. Resistance and support trendlines can be one of the most common areas where a security will experience a reversal. However, not all securities will reverse at these trendlines which makes them important areas to watch for price movement.

Throwback Patterns at Resistance

Traders may use a variety of different envelope channels to create resistance and support trendlines. Bollinger Bands are one of the most common channels, charting a resistance trendline two standard deviations above the moving average. When a security’s price reaches its resistance level it can either reverse or move through the trendline which over time will push the resistance line higher.

If a security’s price breaks through its resistance trendline it is common for the price to retract back toward the trendline at some point. When the price shows significant retraction and movement sideways, a throwback occurs. A throwback may be a correction followed by a return back below the resistance trendline. However, in many cases a throwback will be followed by further movements higher.

The move back toward the level of a breakout may be alarming and it causes many to panic and close their position because they think the pattern is not valid. This retest of the breakout level isn’t all that bad and is quite common. The successful bounce off the resistance can actually help strengthen the pattern and its suggested new direction.

Pullback Patterns at Support

A pullback is often characterized as the opposite of a throwback. This chart pattern is based on the same concepts as a throwback however it occurs at the support line. In a pullback pattern a price will break through its envelope channel support line and then retract back toward the support line.

A pullback may be followed by movement back above the support line. However, similar to price action following a throwback, the pattern is likely to continue breaking further away from the support level. Generally, both a pullback and throwback show new supply and demand being established in the market that creates further momentum towards the breakout direction.

Pullback Definition

What is a Pullback?

A pullback is a pause or moderate drop in a stock or commodities pricing chart from recent peaks that occur within a continuing uptrend. A pullback is very similar to retracement​ or consolidation, and the terms are sometimes used interchangeably. The term pullback is usually applied to pricing drops that are relatively short in duration – for example, a few consecutive sessions – before the uptrend resumes.

Key Takeaways

  • A pullback is a short pause or brief reversal in the price action of a stock or commodity.
  • The duration of a pullback is usually only a few consecutive sessions. A longer pause before the uptrend resumes is generally referred to as consolidation.
  • Pullbacks can provide an entry point for traders looking to enter a position when other technical indicators remain bullish.

What Does a Pullback Tell You?

Pullbacks are widely seen as buying opportunities after a security has experienced a large upward price movement. For example, a stock may experience a significant rise following a positive earnings announcement and then experience a pullback as traders with existing positions take the profit off the table. The positive earnings, however, are a fundamental signal that suggests that the stock will resume its uptrend.

Most pullbacks involve a security’s price moving to an area of technical support, such as a moving average or pivot point, before resuming their uptrend. Traders should carefully watch these key areas of support since a breakdown from them could signal a reversal rather than a pullback.

Example of How to Use a Pullback

Pullbacks typically don’t change the underlying fundamental narrative that is driving the price action on a chart. They are usually profit-taking opportunities following a strong run-up in a security’s price. For example, a company may report blow-out earnings and see shares jump 20%. The stock may experience a pullback the next day as short-term traders lock in profits. However, the strong earnings report suggests that the business underlying the stock is doing something right. Buy and hold traders and investors will likely be attracted to the stock by the strong earnings reports, supporting a sustained uptrend in the near-term.

Every stock chart has examples of pullbacks within the context of a prolonged uptrend. While these pullbacks are easy to spot in retrospect, they can be harder to assess for investors holding a security that’s losing value.

In the example above, the SPDR S&P 500 ETF (SPY) experiences four pullbacks within the context of a prolonged trend higher. These pullbacks typically involved a move to near the 50-day moving average where there was technical support before a rebound higher. Traders should be sure to use several different technical indicators when assessing pullbacks to ensure that they don’t turn into longer-term reversals.

The Difference Between a Reversal and a Pullback

Pullbacks and reversals both involve a security moving off its highs, but pullbacks are temporary and reversals are longer term. So how can traders distinguish between the two? Most reversals involve some change in a security’s underlying fundamentals that force the market to reevaluate its value. For example, a company may report disastrous earnings that make investors recalculate a stock’s net present value. Similarly, it could be a negative settlement, a new competitor releasing a product or some other event that will have a long-term impact on the company underlying the stock.

These events, while happening outside of the chart, so to speak, will appear over several sessions and initially will seem much like a pullback. For this reason, traders use moving averages, trendlines and trading bands to flag when a pullback keeps going and is at risk of entering reversal territory.

Limitations in Trading Pullbacks

The biggest limitation of trading pullbacks is that a pullback could be the start of a true reversal. Being that both pullbacks and reversals happen on a range of timeframes, including intraday if you want to go granular, one trader’s multi-session pullback is actually a reversal for a day trader looking at the same chart. If the price action breaks the trendline for your timeframe, then you may be looking at a reversal rather than a pullback.

In this case, it is not the time to enter a bullish position. Of course, adding other technical indicators and fundamental data scans to the mix will increase a trader’s confidence in identifying pullbacks from true reversals.

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