In practice
Pullbacks are where trend traders prefer to enter. Price is closer to the level that would prove the idea wrong, so the stop is smaller and the same target pays more for the risk taken.
Traders look for a pullback to slow down into an area that makes sense, such as a prior level, a moving average or a zone left by the last impulse, and then for a sign that the trend is resuming.
What to watch for
No one knows in advance whether a move against the trend is a pullback or the start of a reversal. A pullback that is faster and larger than the impulses before it deserves suspicion.
Related terms
3 terms- ImpulseA fast move in the direction of the trend, with big candles covering a lot of ground.
- Fibonacci retracementLevels at 23.6%, 38.2%, 50%, 61.8% and 78.6% of a move, used to judge how deep a pullback might go.
- Optimal trade entryOTEICT's entry zone between the 62% and 79% retracement of a leg, with 70.5% as the sweet spot.