How to Trade the Pullback!
- Trader Stewie
- 2 hours ago
- 5 min read
Hi folks,
I just wanted to make a new post highlighting a trade Art of Trading members made this week. There is a lot to learn here and I think this would be a fantastic place to cover that, as usual in the step-by-step, in depth fashion!
Skillsets and strategies highlighted within this step-by-step guide can be found here:
The official Art of Trading Blog is structured in a way so related posts mesh with the next creating a learning environment with flow and purpose. Use this as a resource to become a more confident, educated and well rounded trader in the markets!
Since May the market has been blessed with a strong rally higher paired in a relatively low volatility environment. As much as that looks "easy" on paper that doesn't mean that, that environment isn't filled with its own unique set of challenges. It isn't uncommon to get caught up in the excitement of a strong rallying market. This is where bad habits, poor trading tactics and less than ideal trade management can go unchecked. Basically "it works until it doesn't."
Traders tend to chase stocks higher taking entries and "setups" that they wouldn't otherwise take and as PnL snowballs higher so does the risk in which they take trades.
Today we're going to discuss strategies that you, yourself can easily deploy in these environments which naturally cut down on risk, increase potential reward and ultimately lead to higher probability outcomes. Which is much more sustainable then just chasing anything and everything that "just goes up".
Each morning I present Art of Trading members with a day trading idea. Sometimes these ideas are strictly for day trading purposes only but sometimes these ideas can also be strategic entries for multi-day swing trades. I consider multiple timeframes when I present these ideas and I break down how I would approach the trade. Since these are day trading ideas and are generally a little more fast paced then a typical swing trade I don't officially alert these ideas but I try to give enough guidance so any type of trader new or experienced can follow along with confidence.
Here's a highlight from last week. I'll break this trade down step by step as I usually do in these educational guides!
When generating trading ideas for Art of Trading members I always consider multiple factors before just jumping into a trade.
Lets break down what made $BBAI an attractive trading idea:
The stock made an impressive 2 week rally backed by much higher than average volume
The stock consolidated smartly near $8 high
The stock made a constructive multi-day pullback followed by 4 consecutive days of declining volume
The stock had found support against the 20EMA since May
Breaking down the technical attributes of the trade is essential for coming up with a realistic trading plan. It helps you identify previous price action, how the stock acts and its tendencies as it trades. It helps set realistic expectations, allows you to plan proper entry tactics, stop losses, and most importantly it prepares you for the trade.
As you can see I set those expectations, entry points and exits ahead of the trade. This allows the trader to plan positioning sizing based on potential risk.
How did the trade progress?
Shortly after the open as the stock gapped down it tested the 20EMA on the daily timeframe. The significance of this is it sets up a potential "Holy Grail" setup. Holy Grail technical setups can provide strong risk vs reward entries on strong trending stocks that are making their first big pullback from a recent high. Basically just as we identified in $BBAI earlier in this guide!
Since the stock had pulled back to our targeted entry this was the signal to try the trade. The stop was placed about 4% lower upon entry, around $5.90.
Now the next step was to watch if the stock could maintain its opening range low and make an attempt to go from Red into Green (An R2G trade). Read more about R2G trades here!
Basically if the stock could hold the low and get back into positive territory the chances for a proper bounce attempt greatly increased, thus increasing the probability of a profitable trade!
And it did just that!
Zooming out and identifying key price levels of interest over a wider range of time can assist in stronger entry points. The power of Using Multiple Timeframes to Unlock Hidden Patterns! Often areas of support in strong trending stocks that have held for multiple days to multiple weeks will continue to do so unless the market swiftly corrects or the stock is subjected to a catalyst that would give those price points and pivots a reason to fail or reverse course.
Once you've identified those price levels, zooming into shorter timeframes like a 60 minute, 15 minute or 5 minute chart can help assist with proper entry tactics. To be precise you need to see with precision. Shorter timeframes assist with this as long as you're able to decipher noise within the price action. Position sizing helps within this process.
Throughout the day the trade progressed!
After the stock went from Red to Green momentum began to build. The stock started trending smartly intraday against the 20EMA on the 5 minute timeframe. Methodically trading higher as the day went on.
At this point the stop loss on the trade is either moved to breakeven or slightly above. If the trade was strictly taken as a day trade, the trader could realize half of the trade while the stock made a 5% - 6% gain or taken the entire trade off.
... But some traders positioned well may have continued to hold the move:
When day trade entries turn into big winners sometimes you can review the setup and opt to swing the position. Usually realizing a portion of the trade makes sense this way downside risk is covered. This helps take emotion away from the trade and allows you to manage the trade appropriately as it develops!
Next Steps:
Create a watchlist of momentum stocks & start stalking price levels, pivots & entry points
Review the watchlist, make additions & subtractions as setups come and go
Keep a level head & stop chasing anything that moves
Build upon your strategy & be confident within your process
These short term trading strategies can be a fantastic addition to potential PnL generation in addition to other strategies that are market environment dependent. This is what most traders strive for within their strategies in all types of markets and its an important discipline to perfect no matter the type of market you're trying to trade. It only takes 2 - 3 strategies spread across different market action and timeframes to create a successful and sustainable core strategy.
Cheers and happy trading!
