One of the leading ways forex traders succeed is learning the ability to identify price patterns and act accordingly based on the movements. Some chart patterns are easy to read, while others are challenging, especially to the novices.
Throwbacks and pullbacks are technical indicators with patterns that novices take time to understand. They can cause panic, especially to novice traders leading to the early exit of the trade. However, once they learn how to read and follow the patterns, throwbacks, and pullbacks become some of their best technical trading strategies.
The trading strategies present forex traders with reliable profit-making opportunities, and they are amongst the most common occurrences in the currency market. Some of the traders even use the trading strategies to accumulate profit and protect their positions effectively.
What are Pullbacks and Throwbacks?
Pullback and throwback can either take a downward or upward movement depending on the general trend and breakout direction. The other name for pullbacks and throwbacks is retracements.
A pullback takes place after a price breakout at the support and resistance levels. In a pullback occurrence, the price breakout takes place below the support level and retraces back to the support. It then starts to rebound and act as resistance and takes a downward movement.
A throwback is the opposite of a pullback, and it occurs after the price breaks above a defined or established resistance level. It then retraces back but switches roles to act as support before bouncing back up.
Why Does the Forex Market Pull and Throw?
A breakout through the support and resistance zones generates a panic buy or sell signal that prompts traders, especially the novices, into entering the trade. After a while, the price reverses to hit the recently broken support and resistance levels, turning the position into a losing field, which is frustrating, especially if it occurs immediately after entering the trade.
A novice will assume that there is something wrong with the whole setup, but for the traders familiar with the trading strategies, they stay calm and place protective stops below their entry pots. The result, even if the pattern does not play as expected, is a slight loss. Some of the more experienced traders wait for further price retracement through the newest support and resistance levels. Once the price bounces back, these traders earn several extra movement pips.
A trigger like this tips the delicate balance of buyers and sellers, leading to a breakout and the prices moving outside the established zones. It further throws the forex market off-balance, which might cause some of the traders to enter their trades in the same direction adding to an imbalance in the flow. The result is fast-moving price movements that cause pullbacks and throwbacks.
Where the Pullback Ends
It is hard to tell, with complete accuracy, where pullbacks end. However, they seem to respect the following strategies.
- Previous support levels turned resistance levels
- Previous resistance levels turned support levels
- Moving average
- A dynamic resistance
- A dynamic support
- Fibonacci retracement
Different Types of Pullbacks
- Breakout Pullback
Breakout pullbacks are amongst the most popular trading strategies amongst many traders that use throwbacks and pullbacks. The pullbacks mainly occur during the market turning points when price breaks out of a consolidated pattern. The most popular consolidated patterns are triangles, rectangles, wedges, heads, and shoulders.
- Trendline Pullbacks
Another common pullback tool is the trendline. Trendline pullback trading is only possible at the 3rd, 4th, and 5th contact points. The tool works better when used alongside other pullback methods because it takes too long to validate when used solely. Trendlines used solely require three contact points before validating them. Even though you can connect two random points, you will still need a third to take the shape and pattern of a trendline.
- Moving Average
Moving averages are the most popular technical analysis indicators in forex trading, as they are versatile and easy to use. It is therefore not surprising that you can also use them for pullbacks. The strategy favors both long-term and short-term traders. It is wise to go through the pros and cons of the popular tool before you start trading, as there are some conditions unfavorable for both types of traders.
Fibonacci is another popular technical analysis-trading tool that many traders use to maximize their profits. Combining Fibonacci pullbacks with moving average provides traders with more trading gains. High pullback probability areas occur when a moving average falls into the same place with a Fibonacci retracement.
Wrapping it up
Pullbacks and throwbacks are not the most straightforward trading strategies in the market as they can cause panic, but they are just as effective as many others. The good thing is that you can combine them with other more potent analysis tools for stronger signals and better trading experiences.