8/26/23, 2:33 PM Pullback or Reversal in Trading - Dot Net Tutorials

Pullback or Reversal in Trading: How to Spot the Difference

Back to: Trading with Smart Money

SEE MORE
Watch YouTube Shorts

Ad

Pullback or Reversal in Trading: How to Spot the Difference?

In this article, I am going to discuss Pullback or Reversal in Trading: How to Spot the Difference? Please read our previous article where we discussed Top
Mistakes to Avoid When Pullback Trading and How to Overcome Them.

Introduction to Pullback or Reversal in Trading:

Two of the most important concepts that any trader needs to understand in order to trade successfully are pullbacks and reversals. Understanding the
difference between reversals and pullbacks may determine the difference between a profitable trade and a losing one.

Team up with Google Cloud

Google Cloud offers an easy-to-use platform that your developers will love
Google Cloud Startups Apply Now

In this post, we’ll explain pullbacks and reversals, explain their respective importance, and provide a few tips on how to determine which one you’re dealing
with. Understanding pullbacks and reversals may be challenging for traders of all experience levels, so it’s critical to have a strong foundation on which to
build your trading knowledge.

We’ll talk about what to look for when determining price action, and common patterns that signal a pullback or reversal. Understanding these concepts can
make it easier for you to see potential trading opportunities and avoid making costly errors. So, let’s get started and examine the main differences between
pullbacks and reversals in trading.

Let’s go through a Practical Example

Any trend-following trader has at some point questioned if the pullback they are watching is only a retracement in trend or a complete trend reversal. You
may prevent pullbacks when the price is actually reversing and hold onto winning trades longer by understanding the major distinctions between

https://dotnettutorials.net/lesson/pullback-or-reversal-in-trading/ 1/13
8/26/23, 2:33 PM Pullback or Reversal in Trading - Dot Net Tutorials

retracements and reversals.

Before the most recent pullback, the price was clearly trading within a strong bearish trend, so let’s assume you were short. You expect the price to soon
start trading in the direction of the bearish trend if you could determine whether this most recent move was just a retracement, and you would be able to hold
onto your profitable trade for a longer time.

On the other hand, if you could identify whether this move was in fact a reversal rather than a pullback, you may expect the price to continue to move higher
and could therefore close out your short trade while still in profit or minor loss.

https://dotnettutorials.net/lesson/pullback-or-reversal-in-trading/ 2/13
8/26/23, 2:33 PM Pullback or Reversal in Trading - Dot Net Tutorials

What are Pullbacks and the Psychology behind Pullback?

A pullback is a temporary or short-term price movement that moves against the current dominant trend, later it resumes back into the main dominant market
direction. For example, an uptrend-down move considers a short-term pullback in the uptrend. Pullbacks are sometimes referred to as price Correction or
retracement in dominant trends. Pullbacks are often seen as healthy corrections within an overall trend, and they can provide traders with better
opportunities to enter positions at more favorable prices. The key to success in the pullback trading method is understanding the difference between a
pullback and failed pullback.

The price never moves in a straight line in any financial market; instead, it is often expressed in terms of bullish (rising) and bearish (falling) waves. For
example, during an uptrend pullback, the price goes lower (against the dominant up waves, CALLED impulse waves) before rising again in the direction of
the main trend. When trading pullbacks, traders watch for those corrective waves in order to time trade entries during these corrective waves.

As you know price move is a zig-zag form

1. Movements with the trend are called “impulses/extensions”.

2. Movements against the trend are called “correction/retracement/pullback”.

Let’s start by taking a look at retracements. A pullback is a temporary or short-term price movement that moves against the current dominant trend, later it
resumes back into the main dominant market direction. Take a look at an example of a retracement on nifty daily chart below:

With price trading in a bearish trend, you can see each pullback was a short-term price movement that moves against the current dominant trend, and later it
resumes back into the main dominant market direction. Each pullback on the chart was a temporary move and didn’t signal a change in the overall trend from
bearish to bullish.

https://dotnettutorials.net/lesson/pullback-or-reversal-in-trading/ 3/13
8/26/23, 2:33 PM Pullback or Reversal in Trading - Dot Net Tutorials

What is a Reversal?

A reversal, on the other hand, is a longer-term change in the direction of a trend. flipping from a bullish trend to a bearish trend and vice versa. Reversals are
characterized by a change in the overall pattern of higher highs and higher lows in an uptrend, or lower lows and lower highs in a downtrend. Now let’s
compare the above with a look at reversals. Check out an example of a reversal on the 5 MIN NIFTY chart below:

Here you can see that the pullback was in fact a reversal, as the trend changed from a bearish trend to a bullish trend.

Pullback vs Reversal – Key Differences in Trading

Pullbacks are temporary price retracements that occur in the direction of the main trend, while failed pullbacks are price movements that initially appear to be
a pullback but end up breaking through a significant support or resistance level. Identifying pullbacks and failed pullbacks in a chart can be a challenging task
for traders.

To determine whether a price movement is a pullback or a reversal, traders must consider several key factors. These include

1. The overall trend

2. Price action at a key level of support and resistance

https://dotnettutorials.net/lesson/pullback-or-reversal-in-trading/ 4/13
8/26/23, 2:33 PM Pullback or Reversal in Trading - Dot Net Tutorials

3. Volume and momentum behind the pullback

4. Volatility

By carefully analyzing these factors, traders can better differentiate between pullbacks and reversals and make more informed trading decisions.

Overall trend or context

Identifying the current trend and its strength is the first step for traders to take in order to determine if a move is a pullback or a reversal. This can be
accomplished using price action and technical analysis techniques, such as trendlines, chart patterns, and the strength of an impulse move.

The strength of the current trend can provide some indication of whether a price movement against the trend is likely to be a pullback or a reversal. A strong
trend is less likely to reverse completely, while a weak trend may be more vulnerable to a reversal. For more details about how to identify strengths and
weaknesses in trend click here.

Key Level of Support and Resistance

Traders also look at key levels of support and resistance to determine whether a price movement is a pullback or a reversal. Pullbacks typically occur at
support or resistance levels, where buyers or sellers are expected to step in and take control of the market again.

you can see that price retested previous resistance as support each time a retracement occurred. As long as these support zones were holding in an
uptrend, there was no reason to suspect that these pullbacks indicated a trend reversal. Each pullback on the chart was a temporary move and didn’t signal
a change in the overall trend from bullish to bearish and vice versa

https://dotnettutorials.net/lesson/pullback-or-reversal-in-trading/ 5/13
8/26/23, 2:33 PM Pullback or Reversal in Trading - Dot Net Tutorials

However, if the price breaks through a key level during a pullback and fails to continue in the original direction of the trend and after the breakout of the key
level of support zones were holding in a downtrend (bounce from support in uptrend expect failed pullback or trend reversal).for more about reversal
structure click here.

https://dotnettutorials.net/lesson/pullback-or-reversal-in-trading/ 6/13
8/26/23, 2:33 PM Pullback or Reversal in Trading - Dot Net Tutorials

Volume and Volume Analysis

Volume: In simple terms, the volume factor refers to the amount of trading activity that occurs during a particular period. Volume can provide clues as to
whether a price movement is a pullback or a reversal.

A pullback typically occurs on lower volume than the initial trend and volume tends to decrease as prices move against the trend and this is due to profit
booking, pullback shows mixed candle candles with volume decreasing.

As you can see in the above chart example A pullback typically occurs on lower volume than the initial trend and volume tends to decrease as prices move
against the trend and mix candle candles with volume decreasing. We want to prefer these types of pullbacks when entering pullback trading.

https://dotnettutorials.net/lesson/pullback-or-reversal-in-trading/ 7/13
8/26/23, 2:33 PM Pullback or Reversal in Trading - Dot Net Tutorials

While a reversal or failed pullback often occurs on higher volume as traders and investors adjust their positions or traders take positions in anticipation of the
new trend. Failed pullback shows consecutive strong candles with volume increasing, it may be a sign that the trend is weakening, and a reversal may have
occurred

Spread of Candle

In the case of a pullback, traders should look for momentum divergence to signal that the counter-trend move is likely to be temporary.

A great mix of red and green candles

Closes towards the middle with wicks

On the other hand, if there are strong indications of increasing momentum in the opposite direction of the prevailing trend, this may indicate that a reversal is
taking place.

Strong consecutive candle close

and size increasing

https://dotnettutorials.net/lesson/pullback-or-reversal-in-trading/ 8/13
8/26/23, 2:33 PM Pullback or Reversal in Trading - Dot Net Tutorials

Conclusion

Factor to study Pullback Reversal

Definition A pullback typically retraces a small portion of the prior Reversal is nothing but failed pullback and retrace full
move

Context (overall trend) A strong trend is less likely to reverse completely while a weak trend may be more vulnerable to a reversal

The key level of support and support zones were holding in the uptrend. support zones were holding in a downtrend after breaking
resistance off the market structure

volume pullback shows mix candle candles with volume Failed pullback shows consecutive strong candles with
decreasing volume increasing

Volatility momentum divergence Volatility Increasing

A great mix of red and green candles Strong consecutive candle close

Closes towards the middle with wicks and size increasing

In this article, I am going to discuss 2 Pullback Trading Strategies You Must Know as a Trader. Here, in this article, I try to explain Pullback or Reversal in
Trading: How to Spot the Difference. I hope you enjoy this Pullback or Reversal in Trading: How to Spot the Difference article. Please join my Telegram
Channel and YouTube Channel as well as my Facebook Group to learn more and clear your doubts.

https://dotnettutorials.net/lesson/pullback-or-reversal-in-trading/ 9/13
8/26/23, 2:33 PM Pullback or Reversal in Trading - Dot Net Tutorials

← Previous Lesson Next Lesson →

Top Mistakes to Avoid When Pullback Trading and 2 Pullback Trading Strategies You Must Know
How to Overcome Them?

Leave a Reply
Your email address will not be published. Required fields are marked *

Comment *

Name*

Email*

Website

Post Comment

Price Action
 How to Study Candlestick
 Candlestick Analysis in Trading
 Price Action Analysis
 Advanced Price Action Analysis
 Thrust Pullback and Measuring Move Analysis
 How to Trade with Smart Money
 Supply and Demand Zone Trading
 How to Day Trade with Trend
 Multiple Time Frame Analysis
https://dotnettutorials.net/lesson/pullback-or-reversal-in-trading/ 10/13
8/26/23, 2:33 PM Pullback or Reversal in Trading - Dot Net Tutorials

 Head and Shoulder Patterns

 How to Trade with Support and Resistance
 Advanced Candlestick Analysis
Hosting with Free Domain &
 Trendline Trading Strategy SSL
 WRB Trading Strategy
Get Online, Get Visible. Claim your online space with
Day Trading Strategies GoDaddy!
 VWAP Trading Strategy
 Gap Trading Strategies
 Intraday Open High Open Low Trading Strategy in.godaddy.com Shop Now
 PIN BAR Trading Strategy
 Trading with Sideways Price Action Area
 Pullback Trading Strategy
About Privacy Policy Contact ADO.NET Tutorial Angular Tutorials ASP.NET Core Blazor Tuturials ASP.NET Core Tutorials ASP.NET MVC Tutorials
 Intraday Breakout Trading Strategy
ASP.NET Web API Tutorials C Tutorials C#.NET Programs Tutorials C#.NET Tutorials Cloud Computing Tutorials
Data Structures and Algorithms Tutorials Design Patterns Tutorials DotNet Interview Questions and Answers Core Java Tutorials
Risk Management
Entity Framework for
 3 Techniques Tutorials JavaScript Tutorials
Risk Management in Trading LINQ Tutorials Python Tutorials SOLID Principles Tutorials SQL Server Tutorials Trading Tutorials
 4 ThingsJDBC Tutorials
I Wish Java IServlets
I Knew When Started Tutorials
Trading Java Struts Tutorials C++ Tutorials JSP Tutorials MySQL Tutorials Oracle Tutorials
ASP.NET Core Web API Tutorials HTML Tutorials
Stock Selection & Live Scanner
 How to Make Your Own Day Trading Scanner
 Stock Selection for Intraday Trading © Dot Net Tutorials | Website Design by Sunrise Pixel

Intraday Trading Course

 Intraday Trading Course
 Multiple Timeframe Analysis for Intraday Trading
 VWAP Trading
 Opening Range Trading Strategy
 Opening Range Breakout

Volume Price Action Analysis

 Volume Analysis in Trading
 Volume Price Action Analysis
 Volume Spread Analysis in Trading
 Candlestick Pattern Analysis
 Finding Entry Opportunity using Volume Spread Analysis
 Spring and Upthrust Trading Strategy
 VSA Trading Strategy

Option Chain Analysis

 Option Chain Analysis in Trading

Indicator
 RSI Trading Strategy

https://dotnettutorials.net/lesson/pullback-or-reversal-in-trading/ 11/13
8/26/23, 2:33 PM Pullback or Reversal in Trading - Dot Net Tutorials

BTST
 BTST Trading Strategy

TECHNICAL ANALYSIS MASTERCLASS

 Technical Analysis in Trading
 Market Structure in Trading
 Understanding Market Structure through Swing
 Supply and Demand Trading (Part – 1)
 Supply and Demand Trading (Part – 2)

Chart Patterns
 Top 7 Chart Patterns in Trading Every Trader Needs to Know
 How to Trade Bull Flag and Bear Flag Pattern

CPR and Pivot Point and VWAP Trading System

 Pivot Point Trading Strategies
 Central Pivot Range Trading Strategy
 Swing Trading Strategy Using Pivot Point

Trading Strategies
 Darvas Box Trading Strategy
 Volatility Contraction Pattern Trading Strategy
 Volume Spike Trading Strategy
 Fibonacci Trading Strategy
 Fibonacci Trading Strategy using Confluence Factor

Smart Money Trading Strategies

 Order Block Trading Strategy
 Smart Money Market Structure Trading Strategy
 Breaker Block Trading Strategy
 Liquidity Hunting or Stop Hunting in Trading
 Sniper Order Block Entry Trading Strategy

Pullback Trading Master Class

 6 Price Action Pullback Trading Strategy Types You Should Know
 Top Mistakes to Avoid When Pullback Trading and How to Overcome Them?
 Pullback or Reversal in Trading: How to Spot the Difference
 2 Pullback Trading Strategies You Must Know

How to Become a Successful Trader

 Free Price Action Trading Course
 How to Become a Successful Trader

Most Popular Trading Books

 Most Recommended Trading Books
 Most Recommended Intraday Trading Books
 Most Recommended Swing Trading Books
 Most Recommended Candlestick Trading Books
 Most Recommended Price Action Analysis Books

https://dotnettutorials.net/lesson/pullback-or-reversal-in-trading/ 12/13
8/26/23, 2:33 PM Pullback or Reversal in Trading - Dot Net Tutorials

https://dotnettutorials.net/lesson/pullback-or-reversal-in-trading/ 13/13